The objective of the SBA 504 loan program is to achieve economic development through job creation and retention or other economic impacts by providing long-term fixed asset financing to small business concerns. SBA 504 loans enable business owners to buy commercial real estate and other fixed assets at below-market, long-term, fixed interest rates. Fully amortized over 25 years, these payments carry no balloon payment.
LOAN AMOUNT
The SBA 504 loan may finance up to 40% of an eligible project, not to exceed $5,000,000 ($5,500,000 for manufacturing firms). The borrower is required to inject at least 10%. The borrower’s bank provides the remaining amount, typically 50%.
INTEREST RATE
The interest rate is a fixed rate set by the sale of a Debenture (a type of commercial bond), which funds the SBA 504 loan, and is guaranteed 100% by the SBA. The interest rate is generally set at a fixed rate slightly above the 5 and 10-year Treasury bill rates and will remain fixed for the term of the loan. Terms are 10 years for Equipment loans and 20 or 25 years for Real Estate loans.
PROJECT ELIGIBILITY
An eligible project can include commercial building purchase, new construction, renovations or expansions, acquisition of machinery, equipment, fixtures, land and site improvements, and certain eligible soft costs associated with the above.
BUSINESS ELIGIBILITY
An eligible project can include commercial building purchase, new construction, renovations or expansions, acquisition of machinery, equipment, fixtures, land and site improvements, and certain eligible soft costs associated with the above.
LOAN AMOUNT
The SBA 504 loan may finance up to 40% of an eligible project, not to exceed $5,000,000 ($5,500,000 for manufacturing firms). The borrower is required to inject at least 10%. The borrower’s bank provides the remaining amount, typically 50%.
INTEREST RATE
The interest rate is a fixed rate set by the sale of a Debenture (a type of commercial bond), which funds the SBA 504 loan, and is guaranteed 100% by the SBA. The interest rate is generally set at a fixed rate slightly above the 5 and 10-year Treasury bill rates and will remain fixed for the term of the loan. Terms are 10 years for Equipment loans and 20 or 25 years for Real Estate loans.
BUSINESS ELIGIBILITY
Eligible small businesses include those with fewer than 500 employees or who have an aggregate business net worth of less than $15 million dollars and/or an aggregate net profit of less than $5 million dollars. They must be for-profit companies with sound business purposes and demonstrate sufficient economic impact through the project.
PROJECT ELIGIBILITY
An eligible project can include commercial building purchase, new construction, renovations or expansions, acquisition of machinery, equipment, fixtures, land and site improvements, and certain eligible soft costs associated with the above.
SBA 504 Effective Rates
Interest rates are determined by SBA and change on a monthly basis.
6.202%
25-Year Rate
6.271%
20-Year Rate
6.478%
10-Year Rate
- Lower down-payment requirements – typically 10%
- Long repayment terms (25, 20 and 10 year options)
- Fixed rate for the term of the loan
- Projected income is considered, not just historical cash flows
- Collateral is typically the building being financed
- Purchase, construct or improve commercial real estate
- Buy & install heavy equipment for your business
Most 504-financed purchases are for office, retail or industrial buildings. SBA 504, fixed-rate loans finance 40 percent of the total purchase. A bank or other lender provides 50 percent and the business owner contributes a 10 percent down payment. For example, if the building purchase price is $500,000, the following would be the loan structure:
- Bank 1st mortgage – $250,000 (50%)
- SBA (PAC) 2nd trust deed – $200,000 (40%)
- Borrower down payment – $50,000 (10%)
To be eligible, your business must operate as a for-profit company in the United States, The business’s tangible net worth must be less than $15 million. On average, after-tax net profit must be $5 million or less for the prior two years.
SBA-504 loans can finance up to 40% of the total project cost, or $5 million. Certain eligible energy-efficient or manufacturing projects may qualify for more than one 504 loan up to $5.5 million each.
Straight purchases usually require no more than 90 days to fund. If construction is involved, this can extend the process.
All the fees are financed into the loan; consisting of 2.625% of the loan amount plus legal fees of $2,500.
There is a declining prepayment penalty for the first ten years of the loan, based on the loan amount and funding rate.
Yes, “soft costs” (e.g. appraisals, environmental, construction interest, closing costs) can also be financed in the 504 loan, allowing the small business to preserve working capital.
The business must occupy 51% of an existing building purchase or 60% if constructing a new facility.