SBA 504 Loans: an Introduction

Since US Cargo Control was founded in 2005, the company has been growing rapidly. Our most recent expansion is now getting underway with a 42,750- sq. foot addition to our warehouse. The project was made possible in part by a loan program through the government’s Small Business Administration (SBA)- the SBA 504 loan program.

The SBA 504 Loan program is a powerful economic development program that offers small businesses an option for business loan financing. The long-term, fixed-rate financing can be used for expansion or modernization and is made available through a Certified Development Companies (CDC).

A SBA loan 504 is a partnership between a CDC, the SBA, and a lender. Because the SBA loan guidelines and steps to obtain a SBA 504 loan can be complex, we’ve developed a series of SBA 504 videos in hopes that it can answer common questions about the program. The SBA 504 program has been extremely helpful to building our business, so we’re excited to be able to share what we’ve learned with others that may be looking to start a small business or expand their existing business.

We’ll include the full transcript below each video for easy reference. Please feel free to comment or ask questions below each video or send us a personal message via the “Contact Us” link at the bottom of the page.

The Benefits of a SBA 504 Loan for Small Business

Today’s SBA Loan video outlines the benefits of the SBA 504 loan program. See the full transcript below the video for easy reference.

What is a SBA loan? To give you some background, the Small Business Administration was founded in 1953 at the suggestion of President Dwight Eisenhower to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.”  The organization also sought to ensure that a fair proportion of government contracts would be awarded to small business.  The SBA 504 loan program was founded five years later as an extension of this mission.

The SBA 504 Program has several key benefits for financing a business. The primary benefit of the program is that it provides a means to obtain financing for larger projects when traditional bank financing may not be available.  Many small businesses do not have the size and stability required to make banks comfortable extending large amounts of debt.  As we’ll discuss later, the program entices banks to participate by giving them first rights on all project collateral while only requiring them to fund 50% of the overall project.  The bank may, for example, end up with a $1MM loan on $2MM of collateral.  This makes the bank feel very comfortable even in the worst case scenario of their borrower going out of business, that the bank will likely not suffer a loss.

Another key benefit of the 504 program is that it generally only requires the business to contribute 10% of the overall project costs.  Again, many small businesses can find it very difficult to accumulate enough cash to contribute a typical 20-25% down payment or more.  This feature of the SBA 504 loan program eliminates that roadblock.  In addition, while cash may be required by the bank, the SBA 504 program itself does not require a cash down payment.  The business may be able to make their 10% contribution in other ways, such as land or non-bank debt.

A third very important benefit is that generally, the 504 SBA small business loan program offers the business the lowest long-term fixed rate available on 40% of the project.  As we’ll mention later, the SBA portion of the financing will be locked for either 10 or 20 years and business owners can have peace of mind knowing that almost half of their total financing is locked in at below-market rates for the entire length of the loan. 

The final advantage I’ll mention is that by utilizing the 504 SBA loan program, your bank will be freed up for additional business lending when you need it.  As I mentioned earlier, a smaller business’s lack of size and stability will limit its ability to get traditional bank loans.  Regardless of other factors, a bank will likely not be comfortable with aggregate loans to a business over some level.  That level will vary bank to bank but generally speaking, if you’re going to be requesting bank loans in the future it’s better to leave some room between what the bank has loaned you and their maximum comfort level.  Have regular discussions with your bank about your potential needs in the future and make sure you understand your limitations.


SBA 504 Eligibility Guidelines

This SBA Loan video outlines the SBA 504 loan eligibility requirements. For easy reference, see the full transcript below the video.


Now that we’ve discussed the main benefits of the program, let’s talk about how it works. Who’s eligible? To be eligible for the 504 loan program, you must meet some basic small business loan criteria of SBA 504 requirements.

First, you must be organized as a “for-profit” business.  Not-for-profit organizations are not eligible for SBA 504 loans.

Secondly, your business must fall under the SBA size standards.  The standards vary somewhat by industry but generally a business qualifies if it has a tangible net worth of not more than $15 million, and an average net income of $5 million or less, after federal income taxes for the preceding two years prior to a SBA 504 loan application.

In addition to being organized “for-profit” and meeting the size standards, there is a job creation requirement as part of the SBA 504 loan requirements. Generally, a business must create or retain one job for every $65,000 guaranteed by the SBA.  Small manufacturers must create or retain a ratio of one job for every $100,000.  As an alternative to job creation or retention, your business may qualify if it meets a community development or public policy goal as long as the CDC maintains its portfolio job average requirements.

Moreover, there are some types of businesses that are automatically disqualified for SBA assistance; for example, real estate investment firms, casinos, and lending organizations to name a few.  You can find a complete list of ineligible business types on Small Business Administration web-site (

As a final note on SBA loan eligibility – start-ups are not excluded from the SBA 504 financing loan program but will generally require a larger down-payment contribution.



SBA 504 Loans: Terms, Conditions, and Fees

Today’s SBA Loan video outlines the basics of the terms, conditions and fees of the SBA 504 program. See the full transcript below the video.

As with any financing, there are various SBA 504 loan terms, conditions and fees to be aware of. Let’s walk through these as they relate to the SBA 504 loan program.

First, we’ll discuss the bank loans:

Amortization / Balloon. The term of the bank’s construction line will vary but, in general, the bank will make the construction line for as long as is needed to complete the project (for a building project, this is typically 6-12 months).  It is advisable to request a construction line term for slightly longer than the estimated construction time to allow extra time for delays and for gathering the necessary items to close on the CDC loan.

The term for the permanent bank loan is required to be at least 10 years but the bank is permitted to reset the rate during the term of the loan.  When the rate resets, it will usually adjust to some pre-determined index plus a spread (for example, the bank may elect to commit to the loan for 10 years but have the rate adjust every year to Prime + 1.00).  At the end of the 10 year term, bank loans will need to be renewed.  In regard to amortization period, while this too varies among banks, most will prefer a 20 year schedule for real estate but are willing to go up to 25 or 30 years.  Commonly, a total project may include both real estate and machinery and equipment.  In this case, a weighted average is typically applied to the value of the collateral and the amortization period is set accordingly.

Interest Rate. The SBA 504 loan rates on the bank construction line are negotiable but small business loan rates are typically a variable rate tied to the Prime rate index.  (The business loan interest rates on the permanent bank term loan are also negotiable, with options as previously discussed.)

Fees. As with the SBA 504 interest rates, the bank is not limited in their ability to charge origination or other types of SBA 504 loan fees on the construction line or permanent term loan.  This too is negotiable.  If loan fees are charged by the bank, they can be included as project costs to be financed.

Other Closing Costs. On the bank side, the borrower will generally be responsible for all other direct costs the bank incurs in putting the loan together (appraisal, recording and documentation fees, etc.).  These “soft” costs can also be included in the total project costs to be financed.

Personal Guaranty. The bank is under no requirement to obtain personal guarantees from the owner or owners of the business but will commonly require them for new small business loans through the SBA.  As we’ll see in reviewing the requirements for the SBA guaranteed CDC loan, personal guarantees for the CDC loan are required for any 20% or more owner of the business.

In addition to what we’ve discussed, the bank may also require other SBA loan terms and conditions, such as loan covenants or pre-payment penalties, and they’re generally free to underwrite the 504 loan as they see fit.


SBA Guaranteed CDC Loans

This SBA Loan video covers the main terms, conditions and fees related to the SBA guaranteed CDC loan.  CDC stands for Certified Development Company. CDCs are non-profit organizations certified by the SBA to provide financing to small businesses through the SBA’s 504 loan program. A CDC partners with your bank throughout the SBA loan process. For easy reference, see the full transcript below the video.

Now that we’ve gone over the terms, conditions and fees related to the bank loan, let’s move on to the SBA guaranteed CDC loan.

Fully amortizing (10 or 20 yr.).  Unlike the bank loan, the term of the SBA guaranteed CDC loan will always match the amortization period and the interest rate will be locked for the length of the loan.  Once closed, there is no need to renew after 10 years or be concerned with the interest rate adjusting during the life of the loan.  For real estate projects, the term and amortization period is 20 years.  For machinery and equipment, the period is 10 years. 

Fees. There are a few different fees associated with the CDC loan that go to both the SBA and CDC.  The amounts can vary somewhat but generally amount to approximately 2.0-3.0% of the CDC loan.  These fees, along with any other closing costs, get rolled into the total project to be financed.

Personal guaranty. In terms of personal guarantee requirements, the SBA small business loan program will require personal guarantees from anyone owning 20% or more owner of the company. Though there may be some rare exceptions, this requirement is, for the most part, non-negotiable.

Covenants. As with the bank loan, there may be certain loan covenants required by the SBA or CDC.  This will vary but typically the CDC will follow the bank’s lead in establishing covenants and will require for the CDC loan whatever covenants are required on the bank loan.

SBA 504 prepayment penalty. The SBA guaranteed CDC loan can be paid off early but must be paid off in its entirety (partial pre-payment is not allowed). In addition, the loan must be paid off at certain dates during the year (generally occurring every 6 months). A prepayment penalty based on a declining % of the interest rate on the CDC loan will be charged.

Appraisal.  A real estate appraisal will be required on real estate estimated to have a value exceeding $250,000 or if it is deemed necessary to underwrite the loan.  As long as the appraised value comes in at 90% or more of the estimated value, the CDC is free to close the loan.  If the appraised value comes in at less than 90% of the estimated value, the CDC loan must be either reduced or secured with additional collateral, or, the borrower’s equity contribution will need to be increased by an amount sufficient to cover the gap in value.

Max SBA / CDC loan is $5MM – Finally, while there is no maximum project size, the maximum SBA guaranteed CDC loan is $5MM.  Small manufacturers or specific types of energy projects may qualify for a maximum CDC loan of $5.5MM.

I’ve attempted to cover the main terms, conditions and fees related to the SBA guaranteed CDC loan.  This is not intended to be a complete, exhaustive list.  Other terms, conditions and fees may apply, and it’s best to obtain a complete list from the Certified Development Company you’re going to work with.

How to Choose the Right CDC for Your SBA 504 Loan

This SBA 504 Loan video outlines important points to keep in mind when choosing a CDC for your SBA financing. For easy reference, see the full transcript below the video.

While the bank you choose to work with is critical to your success with the SBA 504 program, the Certified Development Company- or CDC- is also very important.  Though your bank will generally lead the selection of the CDC, there are options, and you should discuss them with your bank.

Relationship with the bank.  As is the case in most aspects of the business world, the relationship between the parties involved plays a role in how smooth or rough the SBA 504 loan program process plays out.  It is best if there is a track record of successful partnership between the bank and CDC.  The bank usually has a particular CDC that it prefers to work with on SBA 504 loans; working with the bank’s preferred CDC is normally the best scenario.

Flexibility. Flexibility of the CDC is another important consideration.  Just as individuals and banks have conservative or aggressive tendencies, CDCs are no different.  While one can get hung up on a certain principle or guideline, others are better at evaluating the big picture and working around under-writing difficulties when the overall risk is reasonable.  When dealing in a highly regimented environment like the SBA 504 loan program, teaming with a flexible CDC can be a huge advantage and could very well be the difference between getting your project financed or not.  This quality is best determined by your bank, but again, if you end up working with a bank with limited SBA 504 small business funding experience, you’ll want to make sure the bank does its due diligence in selecting the CDC via reference checks or whatever other means they may have to determine the suitability of the CDC.  If the bank is not willing or capable of doing some basic research, you should seriously consider talking to some alternative banks.

Responsiveness. It goes without saying that everyone wants to work with people who respond to you in a timely fashion but this is especially important when it comes to the CDC you and your bank will be partnering with for a 504 SBA loan.  It is common for either the approval or closing process, or both, to drag out.  Working with a CDC that does not delay in getting back to you or the bank and is diligent in their dealings with the SBA can shorten the time frame considerably.  Again, here you’ll want to lean on the bank’s experience but make sure it gets discussed.  If the bank has had issues in the past with the CDC, ask them to find an alternative.


Determining Your Credit Worthiness For a SBA 504 Loan

This SBA 504 Loan video describes the guidelines for credit worthiness when applying for small business loans through the SBA 504 financing program. For easy reference, see the full transcript below the video.

Now that we’ve talked about the issues related to working with the right bank and CDC partners, we’ll move on to discuss the primary factors that will be considered in determining your business’s creditworthiness. Your business’s ability to safely make the SBA loan payments due over the length of the loans will be evaluated by both the bank and CDC.  If both the bank and CDC approve your loans, the SBA will make a final review of your eligibility for the SBA programs.  Their review is generally limited to eligibility requirements and they will likely not engage in further credit analysis.

Tenure. One of the main considerations of business credit is length of time in business.  The statistics show that over 50% of small businesses fail in the first five years.  Businesses with longer tenure are simply less likely to fail making this a simple but effective component of business credit analysis.

Cash Flow & Debt Service Coverage.  Probably one of, if not the most important factors in determining a business’s creditworthiness is its ability to generate consistent, positive cash flow.  When assessing whether a business will be able to make the required loan payments, banks and CDCs will calculate what’s commonly referred to as a “debt service coverage ratio.”  There are a number of variations but they all aim to measure the ratio between the amount of cash profit a business has or is expected to generate and the business’s total loan payments.  Typically, SBA 504  lenders will want to see a ratio of at least 1.25:1.00, meaning for every dollar of loan payments due, the business earned at least $1.25 with which to cover it with some cushion.  To say it another way, if, for example, business A’s total loan payments for the year amounted to $100,000, they would have needed to produce at least $125,000 in cash profit during that same period, to be at or above the minimum ratio.   A common litmus test is to add the loan payments required for the new loans being requested to the business’s existing loan payments and compare that number to the amount of cash profit generated during the business’s last fiscal year.  If a business can show they would have been capable, the prior fiscal year, of making all their required loan payments – with the new debt included- and have some cash to spare, they stand a great chance of being approved for a loan through the SBA loan programs.  If this can’t be shown, the credit analyst will be relying on a projection of future, increased earnings which is considered a much riskier loan.  While the debt service coverage ratio test does not automatically approve the loan request, it will usually result in a decline if the ratio is not high enough and plays a huge role in new business financing.

Leverage.  Another very important element of business credit analysis of small business lending is the amount of debt owed compared to the amount of equity or net worth maintained by the business.  Commonly referred to as “leverage,” banks and CDCs will look to this ratio as a considerable piece of the overall analysis.  Though there will be more fluctuation between underwriters on what they consider acceptable levels of debt, they will all have a certain comfort level they prefer to stay within.  A fairly common level credit approvers like to stay under is 3:1, meaning the business’s total debt does not exceed 3 times the business’s equity or net worth. Generally, a business will be allowed to exceed preferred leverage ratios if they can show consistently strong cash flow.

Financial condition of personal guarantors.  As we mentioned earlier, small business owners will normally be required to personally guarantee loans to the business.  As such, the financial condition of the personal guarantors will be evaluated in the decision process.  Guarantors with substantial levels of liquid assets and/or equity in other assets that can be pledged to the loan as additional collateral are preferred.  Personal credit scores will also be reviewed.  Keep in mind that business owners will need to pass a personal liquidity test for their business to be eligible for the SBA 504 program.  Owners with high levels of cash or cash equivalents are deemed to not be in need of SBA assistance and are therefore not eligible.

Business plan.  The final major component of business credit analysis I’ll mention is the business plan.  The importance of this is much greater for a business applicant that is not able to demonstrate or prove its ability to cover all its required debt payments (with the requested debt included) from historical cash flow.  As we discussed earlier, in this scenario the lender will be relying on the business to increase profitability from existing levels.  The bank and CDC will need to believe that the business’s plan for doing so is feasible and has a good chance to be successful.  Factors such as market competition, management experience, and the expenses required to generate and support the increased profits, are some of the main considerations.

To summarize, the bank and CDC need to be comfortable that management is sufficiently knowledgeable, has a sound plan to produce the level of profits needed, and is competent to do so.

Required Information For a SBA 504 Loan

This SBA 504 Loan video outlines the information you’ll be required to submit to apply for SBA 504 financing. See the full transcript below the video.

When and if the time comes where you’re ready to officially apply for a small business finance options through a SBA 504 loan, you’ll need to submit several items.  The following is not an exhaustive list as banks and CDCs may differ in their requirements, but in general, you’ll need to provide:

-Most recent interim financial statements

-A/R and A/P aging reports for most recent interim

-Prior 2-3 years of business tax returns

-Prior 2-3 years of personal tax returns from any 20% or higher owner and anyone else the bank or CDC is requiring to personally guarantee the loan

-Current, personal financial statements from all personal guarantors

-Schedule of existing debt

-Business Plan for start-ups, newer businesses, or when the bank and CDC will be relying on future, increased earnings to support the new debt

-Construction cost schedule for new buildings

-Detailed information on any machinery and equipment being purchased

-Information on source of funds for borrower equity requirement


Timeline For a Typical SBA 504 Loan

This SBA 504 Loan video goes over a mock timeline of events for a typical SBA 504 small business loan. For easy reference, see the full transcript below the video.

The following represents a mock timeline of events for a typical SBA 504 loan involving new buildings starting at the time all required information has been submitted:

i.          All required information is submitted (start of process).

ii.         Bank reviews and formally approves (subject to SBA approval)/rejects request:  2-3 weeks.

iii.        CDC reviews and formally approves (subject to SBA approval)/rejects request: 3-4 weeks (Note: some CDCs will start their review process prior to receiving bank approval which can speed things up.)

iv.        CDC puts final package together and sends to SBA for approval: 1 week.

v.         SBA reviews and formally approves/rejects request: 1 week.

vi.        If approved, bank prepares construction line documents and closes construction line or lines: 1 week.

vii.       Bank allows advances/draws on the line of credit to pay for qualified project costs according to their policies for administering construction lines of credit: 6-12 months.

viii.      Upon building completion and certificate of occupancy, the CDC gathers necessary documentation, obtains title opinion, closes final documents with borrower and submits to SBA for funding approval: 1-2 weeks.

ix.        SBA reviews and issues formal approval to fund: 2 weeks.

x.         CDC makes final preparations to fund SBA guaranteed CDC loan and schedules funding date: 1 week.

xi.        CDC funding occurs, generally within 30-45 days, and pays down bank construction line debt.

xii.       Bank closes permanent bank loan with borrower.

SBA 504 Loan Series: Conclusion

With the help of the SBA 504 program, our business expansion is underway. In just a few short months, our warehouse will triple in size, which will allow us to maintain higher inventory and help our business grow even further. As I said at the beginning, I hope you’ve found this series helpful in becoming familiar with the SBA 504 program and in determining whether it might be right for you.  I wish you the best as you make decisions on how to fund and grow your business.