Understanding SBA 504 Loans: A Complete Guide for Small Business Growth

At Starting Gate Financial, we understand that financing is crucial for small businesses looking to expand, buy commercial real estate, or acquire high-value equipment. One popular financing option for business owners is the SBA 504 Loan, which offers long-term, fixed-rate financing to help businesses grow. This blog will cover everything you need to know about SBA 504 loans, including their purpose, benefits, current rates, and how to qualify.

What is an SBA 504 Loan?

The SBA 504 Loan is a government-backed loan that provides affordable financing for small businesses. It focuses on funding the acquisition of fixed assets such as real estate and machinery, making it an excellent choice for companies aiming to expand operations or modernize their infrastructure.

The loan is structured as a partnership between three parties:

1. The Business Owner – Typically responsible for a 10% down payment.
2. Certified Development Company (CDC) – A non-profit organization backed by the SBA, which finances 40% of the project cost.
3. Private Lender or Bank – Covers the remaining 50% of the cost.

Key Features of SBA 504 Loans

• Low Down Payment: Only 10% to 20% down, preserving cash flow for other business needs.
• Long-Term Financing: Loan terms are 10, 20, or 25 years, depending on the project.
• Fixed Interest Rates: Offers predictable monthly payments with below-market rates.
• Large Loan Amounts: Up to $5 million for standard projects and up to $5.5 million for specific energy-efficient projects.

Current SBA 504 Loan Rates (November 2024)

• 25-Year Term: 6.28%
• 20-Year Term: 6.35%
• 10-Year Term: 6.46%

These rates include fees related to the CDC, SBA, and central servicing agents, making the SBA 504 loan a cost-effective option for long-term financing.

Eligible Uses of SBA 504 Loans

SBA 504 loans are specifically designed to fund large, fixed-asset purchases. Here are some eligible uses:

• Purchasing commercial real estate or land.
• Building new facilities or renovating existing ones.
• Buying heavy equipment or machinery.
• Modernizing facilities to boost productivity.

Please note that working capital, inventory, and speculative real estate investments are not eligible under this program.

Who Qualifies for an SBA 504 Loan?

To be eligible for an SBA 504 loan, your business must meet specific criteria:

• For-Profit Business: Your business must operate for profit.
• Size Requirements: It must meet SBA’s small business size standards, usually under 500 employees or certain revenue limits.
• Occupancy Requirements:
  • Your business must occupy at least 51% of the property for Existing Buildings. This ensures that the property primarily serves the business’s operational needs.
  • For New Construction, your business must occupy at least 60% of the space upon completion, with the option to occupy up to 80% over time if needed. These requirements confirm that the building is primarily used for the company’s growth and operations.
• Net Worth & Income Limits: The business should have a tangible net worth under $15 million and an average net income not exceeding $5 million over the past two years.

Benefits of Choosing an SBA 504 Loan

Here are some of the top benefits:

1. Fixed Interest Rates: Stability in planning and budgeting due to the fixed nature of SBA rates.
2. Lower Down Payments: Only 10% down is required in most cases.
3. Extended Loan Terms: Up to 25 years for real estate loans, which minimizes monthly payments.
4. Supports Business Expansion: Ideal for purchasing new facilities and equipment or renovating existing properties.

How the SBA 504 Loan Process Works

The process for getting an SBA 504 loan involves a few steps:

1. Application: Apply with a Certified Development Company (CDC), which will work with a private lender to structure the loan.
2. Approval: Once approved, you’ll contribute your down payment, and the bank and CDC will fund the remaining project costs.
3. Funding: The CDC issues a debenture (a type of bond), and funds are disbursed to complete the purchase.
4. Repayment: You’ll make fixed monthly payments over the chosen term, typically 10, 20, or 25 years.

How to Apply for an SBA 504 Loan

Applying for an SBA 504 loan may seem daunting, but it can be streamlined by following these steps:

• Gather Documentation: Prepare your financial statements, business plan, and details about the assets you plan to purchase.
• Find a CDC: Work with a local Certified Development Company (CDC), which will guide you through the application.
• Consult with Lenders: Consider contacting multiple lenders to ensure you get the best terms for the 50% financed by a private bank.

Why Choose Starting Gate Financial for Your SBA 504 Loan?

At Starting Gate Financial, we specialize in helping small businesses navigate the complex financing landscape. One of our key strengths is our ability to shop around with several SBA 504 lenders, ensuring you get the best possible terms for your project. Our team is dedicated to providing expert guidance, ensuring you understand every loan process step, and securing the best financing to grow your business.

If you want to learn more about SBA 504 loans, contact us for a personalized consultation. Our experts are here to help you leverage this powerful financing option to achieve your business goals.

Conclusion

The SBA 504 loan is a fantastic tool for businesses looking to expand, modernize, or purchase high-value assets. Its low down payments, competitive rates, and extended repayment terms make it an excellent choice for any eligible small business.

Contact Starting Gate Financial today to explore if an SBA 504 loan is right for you. Visit our website or call us for more information!

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