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How the SBA 504 Loan Works | 5 Things to Know

Understanding the Inner Workings of the SBA 504 Loan Program: 5 Key Components

Small businesses often face hurdles when trying to secure financing for expansion or real estate purchases. The Small Business Administration (SBA) offers various loan programs to support these enterprises, and the SBA 504 Loan Program stands out as an effective tool for facilitating long-term financing needs.

Here are five key aspects that elucidate how the SBA 504 Loan Program operates:

1. Purpose and Structure: The SBA 504 Loan Program is designed to assist small businesses in acquiring fixed assets, primarily real estate and equipment, promoting business growth and job creation. This program operates through a unique three-party structure involving the borrower, a conventional lender (typically a bank), and a Certified Development Company (CDC). The CDC, a non-profit entity certified by the SBA, administers the loan and typically finances 40% of the project cost, while the lender covers 50%, and the borrower contributes a minimum of 10%.

2. Eligibility and Use of Funds: Small businesses meeting specific criteria are eligible for the SBA 504 loan, including a tangible net worth below $15 million and an average net income not exceeding $5 million after federal income taxes for the preceding two years. Funds from this program can be utilized for various purposes, such as purchasing land or buildings, constructing new facilities, renovating existing structures, or acquiring machinery and equipment.

3. Loan Structure and Terms: The structure of the SBA 504 loan is distinctive, offering favorable terms to borrowers. Typically, the CDC portion of the loan is at a fixed rate for 10 or 20 years, providing stability in repayments. Meanwhile, the lender’s portion is set at market rates and usually carries a shorter term, often around 5 to 10 years. This split loan structure allows borrowers to secure a lower down payment, potentially as low as 10%, reducing the immediate financial burden.

4. Interest Rates and Fees: Interest rates for the SBA 504 Loan Program are determined at the time of funding and remain fixed for the duration of the loan. The rates are influenced by the current market conditions and the specifics of the project. Additionally, borrowers should expect various fees associated with the loan, including CDC processing fees, SBA guarantee fees, and closing costs. Despite these fees, the long-term fixed rates and favorable terms often outweigh the initial expenses.

5. Job Creation and Economic Impact: One of the significant aims of the SBA 504 Loan Program is to stimulate economic growth and job creation. As a requirement, businesses must create or retain jobs as a result of the loan. For instance, the program stipulates job creation targets depending on the industry, ensuring that the financial assistance provided contributes to employment opportunities within the community.


In conclusion, the SBA 504 Loan Program stands as an instrumental tool in supporting the growth and expansion of small businesses. By offering favorable terms, fixed rates, and encouraging economic development, it serves as a catalyst for entrepreneurial success while simultaneously fostering job creation and economic stability within local communities. Understanding these five key components can help small business owners leverage this program effectively for their growth initiatives.

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