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Need to Expand or Grow Your Business? Try an SBA 504 Loan

Reviewed by Ty Crandall

November 14, 2023


504 SBA loan Credit Suite

Can an SBA 504 loan really help your business?

When raising capital for a business, consider the SBA.  The Small Business Administration offers many funding options for small businesses. Honestly, these options often have easier to deal with rates and terms than traditional bank financing.  Microloans are available if you only need a small amount.  Disaster loans are available to help businesses with losses due to hurricanes, tornados, and other emergencies.

Express loans are an option if you need funds fast. The 7(a) loan program can help with working capital needs.   For expansion, or to replace or purchase heavy equipment, a SBA 504 loan is going to be your best bet.

Is a SBA 504 Loan the Business Funding You Need?

The long title for the SBA 504 loan program is “The U.S. Small Business Administration 504 Certified Development Company Loan Program.” Truly, the goal of the program is to allow companies to preserve working capital by only requiring a contribution from the borrower of 10%, rather than the traditional 20% or more that most banks require.

Also, as with all SBA loans, there is a government guarantee.

SBA 504 Loan: How Does It Work? 

The SBA gives authority to Certified Development Companies, or CDCs, to provide financing to small businesses through 3rd party lenders.  Usually, these are banks. These CDCs are nonprofit organizations designed to promote economic development in their communities. 

Loans are typically limited to no more than $5 million.  Still, some manufacturing projects or certain energy-efficient projects may qualify for more, up to $5.5 million. 

Interest rates are below market, and they do not change for the life of the loan. 

Terms of 10,20, or 25 years are available, and as mentioned, the down payment is 10%.  Startups and some certain other projects may require up to 20% of the total project cost as down payment.

After the 10% from the borrower, 50% is financing from the bank or credit union in the form of a first mortgage, and 40% is through the CDC in the form of a second mortgage.  The CDC submits a package to the SBA.

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SBA 504 Loan: How Do You Get It?

To apply for a SBA 504 loan, you start with a lender that works with the program. Each lender does have their own eligibility requirements, but at a minimum you must meet SBA standards which include: 

  • Meeting size standards
  • Able to repay
  • Sound business purpose
  • Being a for profit business, officially registered and operating legally
  • Physically located and operate in the U.S. or its territories
  • Owner equity invested in the business
  • Having no funds from any other financial lender

Furthermore, you will also need a business plan, and the SBA offers guidance and help with this as well. 

If you meet these requirements, and the unique requirements set by the specific lender you use, you will likely qualify.  

Most lenders relax on the credit scores requirements due to the government guarantee, but you still need 650+ for most SBA loans.  There are some that will go as low as 620, and these types of requirements can change frequently, so always double check with the specific lender.

SBA 504 Loan: What Can You Use it For?

Funding from a SBA 504 loan can purchase real estate or replace heavy equipment for your small business.  Alternatively, you can purchase additional equipment rather than replacing what you already have.  So, if you are looking to expand or relocate, or if you need more or new equipment, this is the type of SBA loan you would look for. 

SBA 504 Loan: Will It Work for You?

504 loan Credit SuiteNow, will it work for you? That depends.  First, it depends on what you need funding for. If it’s real estate or heavy equipment, you’re good with a SBA 504 loan.  Also, you need to meet all of the requirements set forth above, as well as those set by the specific lender you use. 

Then, there is the question of credit score, and being able to mee the 10% down payment, or 20% if you are a startup or specific special purpose company.

These requirements are much easier to meet for many small businesses than those of conventional loans.  However, 504 loans do not work for everyone. So, if you need funding for real estate and heavy equipment and you cannot get a SBA 504 loan, what do you do? 

What if You Cannot Get a SBA 504 Loan? 

If you need to buy real estate or purchase heavy equipment, but you do not qualify, what can you do? As it turns out, there are options if you cannot get an SBA loan.

Credit Line Hybrid

The credit line hybrid is unsecured business financing.  It is available to pretty much anyone for any type of business expense.  It can be used for real estate, equipment, working capital, and even startup expenses.  Not only that, but there is no security required.  Furthermore, there is no down payment, and you do not have to provide income documentation. It is completely no-doc financing.

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Now, you do have to have strong personal credit.  A credit score of 700+ is required.  Also, there cannot be any late payments in the past 12 months, there can be no open collections or bankruptcies, and there should be less than 4 inquiries in the past 6 months on your consumer credit report.  There also has to be at least 2 open credit cards with a $2,000 limit or higher with 2 years of good payment history. 

Doesn’t sound all that easy to get, right?  Here is the secret. If you do not meet these requirements, you can take on a credit partner that does meet them. The payments will still be reported on the business’s credit report, so business credit will build whether you get the financing yourself or through a credit partner. 

The best part is, amounts can range from $10,000 to $150,000, and often interest rates are as low as 0% for the first 6 to 18 months.  

Business Revenue Lending

If your business has consistent revenue of $120,000 per year or more, you may qualify for this type of funding.  The income is verified using bank statements.  There can be no recent bankruptcies, but the minimum credit score to qualify is as low as 500.  

A business must also be in operation for a year or more, and they must do over 5 small transactions each month to get business revenue financing. 

Equipment-Leasing Financing

You can secure this type of financing by using existing equipment or new equipment you want to purchase as collateral.  Funding is available up to $10 million. Terms range from 5 to 60 months, and you need a minimum 550 FICO. 

The equipment must be new, and most types of equipment are acceptable, including software. 

You’ll need to provide details on the equipment to be financed and, depending on the loan amount and certain risk factors, you may need to show 2 years corporate and personal tax returns.

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Get Help Making the Best Funding Decision for Your Business

These are only a few of the options available.  The number of options can be extremely overwhelming for business owners. Having help from a business credit expert to guide you and help you make the best decisions for your business is vital.  

A business credit expert can not only help you find and get the funding for which you currently qualify, but they can also help you set up and build business credit so that you can qualify for even more funding in the future. 

An expert will be able to get information from lenders that you may not be able to.  For example, they will be able to help you figure out why you are being denied funding, and what changes you need to make to avoid future denials.

A SBA 504 Loan Can Help You Expand and Grow

If you are at the point in your business that you need to add real estate, equipment, or replace equipment, a SBA 504 loan could be exactly what you need. If, however, you see that this type of loan will not work for you, these other options might.  Even if you do qualify for a 504 loan, you may find one of these other options works better.  A business credit expert can help you figure that out.

About the author 

Faith Stewart

Faith has a BBA with a major in Accounting, and a combined 20 years of experience in the fields of finance and account.

Before switching to writing, she spent 10 years working in various areas of small business and personal finance and accounting, including working as a public auditor at BKD, LLP, Financial Director at Central Arkansas Development Council, and Commercial Credit Analyst at Farmer's Bank and Trust.

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