Businesses looking for commercial real estate financing may want to a consider the Small Business Administration’s 504 loan program, which provides low-interest, long-term, fully amortizing commercial real estate loans for eligible borrowers. While SBA 504 loans are not available for apartment buildings, they are available for commercial, owner-occupied properties such as day cares, hotels, office buildings, retail buildings and more. To qualify, a property must be more than 51% owner-occupied. While 504 loans are mainly used for commercial real estate, they can also be used to finance heavy equipment.

In addition to SBA 504 loans, the SBA also offers SBA 7(a) loans which offer significantly more flexibility. Like 504 loans, SBA 7(a) loans can be used for the acquisition or refinancing commercial real estate, but they can also be utilized for working capital, standard equipment financing and other purposes.

SBA 504 Loan Terms Comparison

Qualifying for an SBA 504 Loan

In order to qualify for any type of SBA financing (including 504 and 7(a) loans), a business must first be in an eligible industry. In general, most industries are eligible, with the exception of those that are involved in gambling, banking or lending, religious education, financial trading, illegal businesses, or businesses that are primarily involved in buying and holding commercial real estate. In addition, a business must not exceed the maximum size requirements for its industry. The average maximum size for most industries is $15 million, but may be as little as $750,000 or as much as $38.5 million for certain industries. Click here to download the SBA’s list of business size standards.

It’s important to remember that only for-profit businesses are eligible; nonprofits are not allowed. In addition to being a for-profit business which meets the SBA’s industry and size requirements, a borrowing business must also meet certain job creation or community development goals.

SBA 504 Loans and Certified Development Companies

Unlike SBA 7(a) loans, which are offered by one lender, SBA 504 loans are provided via a partnership between the private lender and a certified development company (CDC), a nonprofit organization that encourages economic development by providing SBA 504 loans for businesses within its local community. Typically, the lender will provide 50% of the loan funds, the CDC will provide about 40%, and the remaining 10% will consist of a borrower down payment. While down payments are only 10% for most borrowers, they generally go to 15% for startups and up to 20% for businesses financing special-use properties (think: nursing homes, breweries, marinas, gas stations, etc.).

Other SBA Loan Requirements and Restrictions

In addition to the general qualification requirements, 504 loans come with certain other stipulations that borrowers should be aware of. For instance, borrowers must not change or alter the ownership of their business without first seeking the approval of the SBA. Plus, borrowers need to seek the permission of the Small Business Administration before attempting to take out any additional financing that uses their commercial property as collateral. The SBA also is very strict in ensuring that borrowers pay their federal taxes, as well as hazard insurance for their property.

Click the link below for a free SBA loan quote and to see what you qualify for. After you fill out the short form, take a look at the SBA loan checklist so you know what documentation you may need if you decide to move forward with the process. 

Sample SBA 504 Loan Terms in 2023

Loan Amount: Up to $15 million

Loan Term: Up to 25 years (fully amortizing)

Rates: Starting at prime + 1.25% to 2.75%

Loan to Value: Up to 90% LTC (80% on hotels and motels) 

DSCR: Minimum 1.20x DSCR on existing cash flow

Reserves: Taxes and insurance

Credit Score: 680+

Recourse: Full Recourse

Assumability: Yes, in event of property sale with nominal fee

Prepayment: Five-year minimum

Properties: Owner-occupied: Hotels, Restaurants, Office, Mixed Use, Retail, Gas Station/C-Store, Day Care, Medical Office, Assisted Living, Warehouse/Manufacturing, Self Storage, Industrial, Land (not multifamily and apartments).