The SBA 504 Loan Program Explained
SBA 504 is a loan program that helps businesses invest in property and equipment. Usually, funding comes as a partnership between a private lender, a nonprofit Certified Development Company (CDC), and the business.
The CDC typically puts in 40% of the project cost, while the private lender funds 50% and the business 10%. The SBA backs the CDC portion of the loan, reducing risk for lenders who put up half the cost of the project. In the case of default, under the SBA 504, the private lender has first lien on project assets.
Unlike SBA 7(a), which may be used for various business purposes, SBA 504 financing is restricted to land purchase, renovations, and long-term use equipment and machinery. SBA 504 financing is long term and fully amortized without a balloon payment. Terms for SBA 504 financing are typically 10, 15, or 20 years. SBA 504 loans typically have lower interest rates and lower down payment requirements than 7(a) loans and express loans, but they require a higher credit score and very strong borrower financials.