What is an SBA 504 Loan?

The United States Small Business Administration (SBA) enables growing businesses to secure long-term, fixed-rate financing for commercial industrial real estate and/or major machinery and equipment through the SBA 504 Loan Program. The program is designed to promote local economic development by helping healthy, growing businesses finance the acquisition of long-term fixed assets, including land, buildings, and major machinery and equipment. The 504 Program gives small business owners access to the same low-cost, fixed-rate, long-term financing that large businesses have through the bond markets.

Why should I consider an SBA 504 loan?

The SBA 504 loan Program offers many benefits to small businesses. The benefits include low down payment (allowing the small business to preserve working capital), longer terms, and larger loan amounts than may be available through a conventional loan. In most cases, the borrower's down payment will be 10% of project costs. If an appraisal deems a building as single purpose or if the business has less than 2 years of operating experience, additional injection (down payment) will be required. In addition, interest rates on the SBA 504 Loan will be below market and the rate will be fixed for the loan term.

​How long do you have to be in business to qualify?

There is no requirement regarding length of time in business; however, start-up businesses are subject to additional injection (down payment).

Can the building be owned by an entity other than the operating company?

Yes, a real estate holding company can own the building. However, in this scenario, the operating company, the real estate holding entity, and all individuals with 20% or more interest must guarantee the loan.

If the operating company is leasing the building from a real estate holding entity, what documentation is needed?

Leases If the Borrower is different from the Operating Company, there must be a lease between the Borrower and the Operating Company for 100% of the property being financed with a 504 loan. If there are third-party tenant(s), the sublease(s) must be between the operating company and the third party tenant(s). Subordination Agreements Every lease and sublease on the property must be made subordinate (or junior) to the 504 Deed of Trust. The Borrower and the Operating Company must sign the Subordination Agreement related to their lease. The Operating Company and any subtenants must sign the Subordination Agreement related to their lease.

How much can I borrow?

Typical 504 loan size varies from $100,000 to $5.5 million depending on eligibility, job creation, community development and economic development goals met by the project.

What costs can be financed?

All costs that are directly attributable to the purchase or construction project can be financed, assuming that the appraisal is high enough.

How much space must the operating company use?

The operating company must occupy a minimum of 51% of an existing building and 60% of a newly constructed building.

What fees are involved?

· SBA Fee: 2.4% of SBA portion of loan.
· Bank Fees: Negotiated with bank, but typically 1% or 2% on bank loan.
· ALL SBA fees and most bank fees are financed.

What are the collateral requirements? Will I have to pledge my home?

The subject property to be financed will be the collateral. CDCs do not usually take personal residences as collateral. However, on a case-by-case basis, CDCs may exercise the option to take additional collateral.

How is my interest rate calculated, and can I lock in the rate today?

The interest rate on the SBA loan is tied to the 5 or 10 year U.S. Treasury rate in effect on the date of funding and is fixed for the loan term. The rate cannot be locked in prior to funding. 

Is my loan assumable?

Yes, SBA 504 loans are fully assumable.

Can the down payment be borrowed?

Preferably the borrower will put at least 10% of their own funds into the project. The down payment can be borrowed, but owners must show that there is sufficient income to service the debt.

Is there a prepayment penalty?

Yes. For a 20 year term loan, there is a declining prepayment penalty in the first 10 years on the SBA portion of your loan. For a 10 year term loan there is a declining prepayment penalty in the first 5 years on the SBA portion of your loan.

Can I refinance a building I already own?

Yes. Contact us for more information.

Can my down payment be other than cash?

Yes, the down payment can be cash or land value, which can include building, structures, and other site improvements that will be part of the project property, previously acquired.

What is the Turnaround Time?

We strive to give a 72-hour loan pre-qualification. The process from a completed application submission to disbursement of funds takes approximately 30 to 90 days, depending on the complexity of the project and the loan.

​Can you recommend a good bank to use?

SoCal CDC maintains strong relationships with banks participating in the SBA 504 program and can guide you in selecting an appropriate lender.