The US Small Business Administration (SBA) has many programs designed to help small businesses get off the ground or move into the next phase of their development. This article focuses on a particularly useful one: the SBA 504 loan.

The Basics of 504 Loans

An SBA 504 loan is designed to give small businesses a boost when it comes to acquiring “fixed assets for expansion or modernization,” according to the SBA’s website. To provide these loans, the SBA works with Certified Development Companies (CDCs), which are smaller organizations focused on fostering economic growth in their area.

The Loan Structure

Generally speaking, an SBA 504 loan is structured in this manner:

  • The SBA provides 40% of the money needed for the project. 
  • The CDC provides 50% of the money needed for the project. 
  • The borrower provides 10% of the money as a down payment.  

These loans have a fixed interest rate, and their term can be for up to 20 years. For the borrower, the advantages of this setup are numerous. Because they need to put relatively money down, much of their cash can remain liquid and usable in other ventures. The involvement of the SBA and CDC makes it possible to obtain funding that might not otherwise be available. Finally, the fixed cost of the monthly payments keeps this ongoing expenditure predictable.

Applying for a 504 Loan

Businesses worth $15 million or less are eligible to apply for an SBA 504 loan. Another requirement is that for two years before applying, businesses need to have an average net income under $5 million after federal taxation. There are additional requirements that may come into play for a specific business. To find out more, the SBA advises that business owners visit their local CDC. There is a searchable database of CDC locations available here.

To learn about other financing options, be sure to check out Mossberg Strategic Capital’s additional blog content.