Before applying for a loan from the Small Business Administration (SBA), it is important to consider the various pros and cons of each type of SBA product. Generally, there are two types of SBA Loans: the 504 Loan and the 7(a) Loan. Each loan has different benefits that can help small business owners grow and maintain their business. In our previous post, we examined 7(a) loans. In this post, we will examine the 504 Loan.
How the SBA 504 Loan Structure Works
The 504 Loan is actually structured as two separate loans: one from an authorized banking institution and the other from a Certified Development Company (CDC)—a non-profit corporation whose main purpose is to support local economic growth.
- Banking Institution: Usually lends 50% of the total loan amount.
- CDC Portion: Contributes between 30%–40% of the loan amount.
- Borrower Down Payment: The SBA usually requires borrowers to contribute a down payment of 10%–20% of the purchase price.
Terms and Personal Guaranties
Personal guaranties of principal borrowers are required if a borrower owns 20% or more of the business. The term of a 504 loan typically depends on how the capital is used:
- 20-Year Term: For real estate purchases.
- 10-Year Term: For the purchase of long-lasting, fixed equipment.
Eligible Uses and Restrictions
504 Loans are generally available for the acquisition of real estate property, financing construction or building improvements, or purchasing heavy machinery or equipment. Generally, a 504 Loan does not collateralize assets outside of the specific assets for which it is providing funding.
One critical thing to keep in mind is that a 504 Loan cannot be used for:
- Working capital
- Purchasing inventory
- Consolidating, repaying, or refinancing existing debt
If you are interested in speaking to someone about 504 Loans, we can provide you with a great referral. Please contact Kapadia Naik & Farhoudi or call us at 770-881-8081 to discuss your lending needs.