Glossary
SBA 504 Loan
An SBA 504 loan is a U.S. Small Business Administration program that finances fixed assets, mainly owner-occupied commercial real estate and long-life equipment. It combines a first lien loan from a private lender, a second lien loan from a Certified Development Company backed by an SBA-guaranteed debenture, and a borrower down payment.
Example
A manufacturer buys a $5,000,000 building for its own use. In a typical 504 structure, a bank provides 50%, or $2,500,000, in first position; the Certified Development Company provides 40%, or $2,000,000, in second position; and the business contributes 10%, or $500,000. The bank's loan to value is only 50%, which reduces its risk, while the borrower finances 90% of the purchase.
How it is used in underwriting
The 504 program lets small businesses buy their facilities with a low down payment and long-term fixed rate financing on the CDC portion. Underwriters at both the bank and the CDC evaluate the business's cash flow, since the property is owner occupied and repayment comes from operations, not rent from third parties. They calculate DSCR using business cash flow and the combined debt service on both loans, review occupancy requirements, and verify job creation or public policy goals the program requires. The bank benefits from a low loan to value first lien, which is why many banks actively offer 504 financing.
Several features differ from 7(a). The 504 portion is funded through a debenture sold to investors, so its rate is set at pooling and its prepayment terms are structured. Startups and special purpose properties such as hotels or gas stations often require a larger down payment, commonly 15% to 20%. The program cannot be used for working capital, inventory or most business acquisitions without a real estate component. Occupancy rules require the business to occupy a majority of the building. Rules change over time, so lenders should confirm current limits and eligibility.
Typical benchmarks
The standard structure is commonly about 50% bank first lien, 40% CDC second lien and 10% borrower equity, with higher equity typically required for startups and special purpose properties.
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Frequently asked questions
What is the 50/40/10 structure in an SBA 504 loan?
In a typical 504 loan, a private lender funds about 50% of the project in first lien position, a Certified Development Company funds about 40% in second position through an SBA-guaranteed debenture, and the borrower contributes about 10% as a down payment. Startups and special purpose properties usually need more equity.
Can SBA 504 be used to buy a business?
504 is designed for fixed assets, so it generally cannot fund goodwill, working capital or inventory. If an acquisition includes owner-occupied real estate or major equipment, 504 can finance those assets, often combined with a 7(a) loan for the business itself. Lenders structure the combination to fit program rules.
What are the occupancy requirements for SBA 504?
The business must occupy a majority of an existing building it purchases, and a higher share of a newly constructed building, with the ability to lease out the remainder. These rules ensure the program supports operating businesses rather than passive real estate investment. Lenders verify current thresholds in SBA guidelines.
Related terms
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