The SBA 504 Loan Program offers an attractive financing option for small businesses looking to grow by acquiring fixed assets or equipment. Qualified companies can borrow up to $5.5 million per project with minimal down payment and interest rates below market. However, the 504 loan comes with eligibility requirements and the need for a solid business plan effectively crafted by an SBA business plan consultant

This article explains the program, how the unique 504 structure works, steps to apply, and how to write a compelling SBA 504 business plan.

What is the SBA 504 Loan Program?

The 504 Loan Program, offered by the SBA, finances small and medium businesses looking to buy or spruce up unmoving assets like real estate, operational equipment, and other fixed assets that boost business and create new jobs. The loans are partly issued and funded by certified development companies (CDCs) that are nonprofit corporations regulated by the SBA and partner with third-party lenders (typically banks). 


The maximum loan amount for a 504 loan is generally $5 million. Still, certain energy-efficient or manufacturing projects may qualify for up to $5.5 million per project for up to three projects to be at most $16.5 million. The borrower contribution is usually 10 percent.

The 504 Loan Program started in 1986 under the Small Business Investment Act 1958. This SBA program has since aided countless small businesses in getting reasonable financing to expand and modernize. The SBA says in fiscal year 2022, the SBA 504 Loan Program greenlit 9,254 loans totaling $9.2 billion and backed over 130,000 jobs.

SBA 504 Loan Eligibility Criteria

To be eligible for a 504 loan, you must satisfy several prerequisites that span basic criteria and additional stipulations unique to this program.

First, your business must check the boxes on standard qualifiers:

  • Operate for profit within the US or territories
  • Fall under current SBA size standards
  • Maintain a tangible net worth of less than $15 million
  • Report average net income below $5 million after taxes over the past two years
  • Demonstrate job creation or other public policy goals per SBA definitions
  • Avoid illegal, speculative, passive, or non-owner-occupied activities

Additionally, you must fulfill extra conditions specific to 504 loans:

  • Submit a feasible business plan (for example, Loan Officer Business Plan) and adequate cash flow to repay
  • Present management with relevant experience and competencies
  • Exhibit a clear need for fixed assets that will benefit operations and growth
  • Use at least 51% of the property for your own business within one year if buying an existing building or three years if constructing
  • Lack of accessible funds from other sources at reasonable terms

Meeting both the fundamental criteria and 504-specific stipulations is imperative for eligibility.

Start your Business Plan Now
Start My Business Plan

Typical Uses for SBA 504 Loan Funds

You can use the proceeds of a 504 Loan for the following purposes:

  • Purchasing land and buildings (including existing buildings)
  • Constructing new buildings or renovating existing buildings
  • Purchasing machinery and equipment (including furniture and fixtures)
  • Refinancing existing debt that is related to the project (subject to certain limitations and conditions)
  • Paying for certain soft costs associated with the project (such as appraisals, environmental studies, architectural fees, etc.)

You cannot use the proceeds of a 504 Loan for the following purposes:

  • Working capital or inventory.
  • Consolidating or repaying interim loans.
  • Financing other businesses.
  • Speculating in real estate.

Carefully examining which purposes qualify and which are forbidden is crucial when deploying SBA 504 loan capital for approved needs without transgressing restrictions.

How To Apply for the SBA 504 Loan?

SBA 504 loans are offered through Certified Development Companies (CDCs), lenders specially qualified to provide 504 financing. 

The CDC structures the 504 loan, which consists of:

  • A conventional first mortgage covering 50% of project costs
  • An SBA-backed second mortgage covering up to 40% of eligible costs
  • A 10-20% down payment contribution from the small business

The CDC partners with a conventional lender for the first mortgage portion and coordinates the SBA second mortgage financing.

To apply for a 504 Loan, you need to follow these steps:

Step 1: Find a CDC that serves your area. You can use the SBA’s online directory to search for CDCs by state or zip code.

Step 2: Contact the CDC and discuss your project with them. They will help you determine if your project is eligible and feasible for a 504 Loan. They will also help you find a private lender to participate in the program.

Step 3: Prepare and submit your loan application package to the CDC. The application package should include:

  • Completed SBA Form 1244 application
  • Detailed project description, including purpose, scope, cost, timeline, and expected benefits
  • Business plan showing market analysis, growth potential, financial projections, management, goals
  • Personal financial statement in SBA Form 413 and 3 years’ tax returns
  • A statement of personal history in SBA Form 912
  • Business financial statements and 3 years of tax returns (or since inception)
  • Relevant business licenses, permits, contracts, leases, deeds
  • Appraisal, environmental report, and architectural plans as needed for the project
  • Any other documents requested by the CDC or lender

Step 4: Your lender and the CDC will review your application, and documents to verify you meet eligibility criteria and your project complies with SBA policies. They will analyze your credit and the feasibility of your project. 

If approved, your lender will issue a commitment letter and the CDC will authorize a debenture guaranteed by the SBA. The debenture is sold to investors to raise funds for your loan.

Step 5: After you receive the commitment letter and the debenture authorization, you must close the loan with your lender and CDC. The closing process may involve:

  • Signing the loan documents and paying any fees or charges.
  • Providing evidence of insurance coverage for the property and equipment to be financed.
  • Providing any additional documentation or information requested by your lender or CDC.
  • Receiving the loan proceeds from your lender and CDC.
Real Estate
Real Estate Business Plan
Suitable for real estate projects, private equity funds, property management companies, real estate developers and agents.

SBA 504 Loan Business Plan

Your business plan is easily one of the most critical documents in your 504 loan application. Think of it as a roadmap that shows the CDC and lender you know what you’re doing. In your written plan, it would be best to show that you know your industry, customers, and financials well. The goal is to convince them your business idea is a winner.

Here’s the deal – a well-researched, accurate business plan can only help your chances at 504 loan approval. It shows the CDC, lender, and SBA you’ve done your homework and know how to make this business work. So, take the time to make it thorough, realistic, and compelling. Consider it your secret weapon in the loan application process.

To craft an effective business plan for your SBA 504 loan, you should include the following key elements that are specific to this type of loan:

Market Analysis and Growth Potential

The market analysis dives into the industry and target market. Pinpoint potential customers, their desires, purchasing patterns, and demographics. Also, investigate competitors’ assets, flaws, market share, and costs.

Clarify how the business separates from competitors and its unique value proposal. Provide proof of market need and growth possible through industry fads, customer input, studies, and sales info. This part should envelop the target market, their likings, competitor intel, how it stands out, and proof of demand and expansion openings.

Financial Projections

The financial projections section should provide detailed costs and revenues for your project over 3 years minimum. Include pro forma income statement, balance sheet, cash flow statement, and breakeven analysis. Provide sources and uses of funds statements showing how you will use the 504 loan and your equity contribution. 

Do a sensitivity analysis showing financial performance under different scenarios like sales, prices, costs, or interest rate changes. Explain the assumptions and methods behind the projections and provide supporting documents like historical financials, tax returns, contracts, invoices, or purchase orders. Check our Financial Advisor Business Plan for a better understanding.

Management Structure and Experience

The management structure and experience section should portray your organizational framework, management team parts, and obligations. Give data on the capabilities, abilities, understanding, resumes, confirmations, and licenses for every key individual included. Feature how the skills and capacities of your administration group will permit effective execution of your field-tested strategy and accomplishing your objectives.

Any questions? Get in Touch!

    Business Goals and Strategies

    The business goals and strategies segment should diagram your particular, quantifiable objectives and how you will accomplish them. Clarify how the 504 credit will help you achieve your goals and advantage your business development, productivity, intensity, and work creation. Portray your procedures for advertising, activities, cost control, and hazard relief. Give a timeline, financial plan, achievements, and measurements to execute your arrangement and screen advance.

    SBA 504 Loan Repayment

    The repayment terms of an SBA 504 loan depend on the type of asset being financed. For machinery and equipment, the loan term is 10 years. For real estate, the loan term is either 20 or 25 years. The interest rates are pegged to an increment above the current market rate for 5- and 10-year U.S. Treasury issues, and are fixed for the duration of the loan. Since the rates are usually not as high as normal loans, the SBA 504 loan can seem like a good choice for small companies.

    The repayment procedure of an SBA 504 loan is as follows:

    Step 1: The borrower makes monthly payments to the CDC and the private sector lender according to the agreed-upon schedule and amount. The payments are usually made by automatic withdrawal from the borrower’s bank account.

    Step 2: The CDC collects the payments from the borrower and remits them to the SBA’s Central Servicing Agent (CSA), which manages the servicing and accounting of the SBA 504 loans. The CSA also collects an annual service fee from the borrower, which is a percentage of the outstanding balance of the CDC portion of the loan.

    Step 3: The private sector lender collects payments from the borrower and handles the servicing and accounting of its loan portion. The lender might also impose extra fees or penalties if payments are late, paid early, or not paid as agreed.

    Step 4: The borrower can check their account balance, due date, interest rate, and other loan details by contacting their CDC or lender directly. The borrower can also see info about their loan online using SBA One, which lets borrowers look at and control their SBA loans.

    Step 5: The borrower can prepay their loan without penalty if they notify their CDC and lender in advance. The borrower can also request a deferment or modification of their loan terms in case of financial hardship, subject to approval by their CDC and lender.

    The SBA 504 loan can be an advantageous financing choice for small businesses looking to obtain or upgrade fixed assets that encourage growth and new jobs. By sticking to the payment process, borrowers can ensure they meet their duties and preserve a solid credit record.

    OGSCapital – Your SBA Business Plan Consultant

    Our team at OGSCapital understands how challenging and competitive it can be to get approved for an SBA 504 loan. We want to help your business put its best foot forward with a convincing business plan that captures your vision.

    When you work with us, you’re not just getting a generic template – you’re getting a custom-crafted plan based on our team taking the time to understand your business deeply and what makes it special. We’ll conduct in-depth research and analysis so we can tell your story in a compelling way to lenders.

    Our skilled business plan writers have helped thousands of real entrepreneurs and small business owners just like you get the funding they need. Our clients appreciate that we take the time to get to know them and their business dreams on a personal level. We have an over 98% success rate because we care and don’t take shortcuts.

    If you could use some guidance in putting together a polished, persuasive plan that will give your SBA 504 loan application the best possible chance, please reach out. We’re happy to provide a free quote and discuss how we can help make your business vision a reality.

    Any questions? Get in Touch

    Frequently Asked Questions

    Q. Are SBA 504 loans secured?

    Yes, SBA 504 loans are secured by collateral, such as real estate, buildings, or equipment. The SBA guarantees up to 40% of the loan amount, while a third-party lender provides 50%, and the borrower contributes 10%. The SBA and the third-party lender may require a lien on the project assets and a personal guarantee from the owners.

    Q. Are SBA 504 loans personally guaranteed?

    Yes, most SBA 504 loans require a personal guarantee from anyone who owns 20% or more of the business. A personal guarantee is a legal agreement that holds you personally liable for the debt if your business defaults. The SBA may also ask for personal guarantees from other business owners or spouses who own less than 20% of the business.

    Q. What is the interest rate on SBA 504 loan?

    The interest rate on SBA 504 loans is fixed and determined at the time of funding. The interest rate is pegged to an increment above the current market rate for 10-year U.S. Treasury issues. As of August 2023, the SBA 504 loan rates are as follows:

    • 10-year term: as low as 6.549%
    • 20-year term: as low as 6.602%
    • 25-year term: as low as 7.063%