A Small Business Association (SBA) 504 loan is intended to help you expand your small business. A 504 loan can help you obtain fixed loans for land, buildings and equipment, and offers rates and terms that are usually better than regular business loans.
SBA 504 loans can help revitalize a community.
Loan Structure
One of the first elements of an SBA 504 loan is the presence of a Certified Development Company (CDC). The CDC works with private banks and the SBA to fund the loan for your business. The private bank typically funds 50 percent of the loan, the CDC contributes 40% of the loan and your small business will put up about 10 percent as a down payment. The SBA guarantees the funds of the CDC and the private bank, which means that the SBA will take over the loan if you default or are unable to repay it.
Maximum Loan Amounts
The maximum amount that the CDC and private lenders can loan depends on the type of business and how your business is contributing to the community. Typically, the SBA will contribute between $1,500,000 and $2,000,000 when your business is creating jobs or contributing to community development. Community development includes recovery of a business district, expansion of businesses owned by minorities, veterans or women, and increases in productivity. If your small business is a manufacturer, the loan amounts will most likely be higher.
Use of Loan Money
Once your SBA 504 loan is approved, you can use the money for specific projects related to your small business. For example, you can use the money to buy a building, renovate an existing building or even buy equipment or machinery that your business needs to function. You cannot use the loan money to buy inventory or as a repayment of an existing business loan.
Eligibility
To be eligible for an SBA 504 loan, your business must have a net worth of less than $8.5 million. Also, your business must have generated less than $3 million in profit, after taxes, for the previous two years. Your business cannot obtain an SBA 504 loan if it is a real estate rental or investment company.
Loan Terms
The interest rates on SBA 504 loans are tied to market rates for five- and 10-year Treasury bills, which means that your rate will be a certain number of percentage points above the rates for the Treasury bills. (You can find Treasury bill rates on the U.S. Treasury's website.) The repayment of the loan is generally more than 10 to 20 years and you can finance the loan fees, which means less money upfront. Learn more about SBA 504 loans through your local bank, the SBA directly or the National Association of Development Companies.
