SBA 504 Loans

The United States Government formed the Small Business Administration in 1953 to help businesses start and grow. The U.S. Small Business Administration or SBA has the goal of preserving free and competitive enterprise within the United States and is charged with maintaining the strength of our economy. The SBA offers a 504-loan program as a financing alternative for small businesses.

SBA 504 loans are a partnership consisting of the SBA, the small business applicant and a third party lender. Usually, 504 loans are for special projects and the loan works by dividing the amount lent between the third party lender, who gives about half the money, and SBA or one of its affiliates gives about 40% of the money. The remaining 10% is what the small business has to come up with for the particular project.

SBA 504 loans consist of three parts. The first part is the 50% that the third party lender provides. This loan does not carry all of the benefits of the 504-loan program. The third party lender determines the interest rate and term of this part of the loan. The SBA or one of its affiliates provides the second part, which is 40% of the total project. This second part of the loan cannot be more than two million dollars and must be for a term of 20 years or less. The final part of the loan is that which the small business provides. Unless the total cost of the project is higher than the amount the SBA can provide, the small business does not have to come up with more than 10% of the total cost unless it is a special use property.

Some of the benefits of a 504 loan include things like financed loan fees, lower down payments, and easier qualification terms. 504 loans can usually cover things like the purchase or renovation of a business’s buildings, the acquisition of land for improvements, and the purchase of long term equipment. Unfortunately, not all business will qualify for a 504 loan from the SBA.

In order to qualify for the SBA 504 loan, a business must be a profit making business. All non-profits are disqualified from these types of loans. The business also has to be worth no more than 7 million dollars and profit less than 2.5 million dollars a year for two years in a row. 504 loan applicants must be the primary users by 51% or more of the building they are financing, but if the loan is for the construction of a new building, the applicant must use at least 60% of the property.

Since the SBA is concerned with the expansion of jobs, 504 loan applicants must prove that at least one job will be created or retained for every $35,000 borrowed. Non-profit organizations, as well as banks or other lending institutions, real estate companies and other development companies are not eligible for the 504 programs.

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