SBA 504 Loan Requirements

The SBA 504 commercial real estate loan is often the preferred financing product for small business owners looking to purchase real estate for their business.  Whether a business owner is buying a warehouse to help expand their business or looking to shift from leasing to ownership, the 504 loan is a valuable option and smart addition to their business strategy.

If you’re a business owner interested in getting an SBA 504 loan for your company, one of the first questions you want to know is exactly what the requirements are to get a 504 loan. And if you’re a lender looking to start or who is already an SBA 504 loan partner, you may be looking for a resource focused on eligibility guidelines.

As the nation’s leading 504 mission-driven small business lender, we put together this guide on the SBA 504 loan program requirements to answer any questions you may have as a business owner or lender.  

When learning about the SBA 504, please note loan project requirements are also sometimes referred to as eligibility requirements. 

What Are The SBA 504 Loan Eligibility Requirements?

The Small Business Administration (SBA) has some specific requirements for you to qualify for an SBA 504 loan, including:

• CDC Small Business Finance provides SBA 504 loans in California, Nevada, and Arizona. While you can get SBA 504 loans nationwide, please note that at CDC Small Business Finance we only provide SBA 504 loans in California, Nevada, and Arizona. If you are outside of our service area, search for a Certified Development Company in your area here.

• Purchase of commercial real estate and heavy equipment.  The 504 loan program provides funds for a few types of projects (according to the SBA): broadly the loan is for the purchase of commercial real estate and heavy equipment.
  • In deeper detail it is for: purchasing undeveloped land and all structural requirements to improve undeveloped land to develop, construction of new facilities, or modernizing, renovating or converting existing facilities; or purchasing long-term machinery and equipment.

• Not for a solely rental purpose project: If you are looking to buy real estate for rental purposes (rental is allowed BUT your business must occupy at 51% of the property)  or to “hold” real estate for investment purchases, you will not qualify for an SBA 504 loan.

• Your business must occupy 51% of the building: If you are purchasing commercial real estate, your business must occupy at least 51% of the property you plan to purchase if it’s an existing building, or 61% of the building if it’s new construction.

• For-profit: Your business must be considered “for profit.” Non-profit businesses are not eligible for SBA 504 loans.

• Business must be worth less than $15 million USD. Businesses worth more than $15 million USD are not eligible for the 504 loan program.

• Net income: Your average net business income must be $5 million or less the previous two years before applying.

• Previous defaults. You cannot have previously defaulted on a federal loan, or be engaged in any sort of political, lobbying, lending, or gambling activity. You also cannot be engaged in passive or speculative activities of any kind; examples – businesses involved in land purchase for sale banking on the flip value of the resale to return profits, an investment firm basing its revenues on the investment sales return versus fee for services revenue stream from its clientele.

• Business plan. You must have a feasible business plan to get an SBA 504 loan. (Don’t worry! Our small business advisors can help and we’ve got some great resources on how to create a business plan here.)

• Cash flow. The project you want to fund must be able to create enough cash flow to repay your loan.

• Job creation. Your project (whether for real estate or equipment/machinery) must also meet the specific SBA 504 loan program job creation or public policy goal requirements. Our SBA 504 loan experts will help you understand the requirement and walk you through the details.  Job creation is an important part of the 504 loan program’s goal to help improve economic development in communities.  As a side benefit, when a borrower works with a high volume 504 lender like us, there are some built in flexibilities. Your loan is considered to be a part of our entire portfolio of loans when judged by the Small Business Administration.  This affords our applicants an economy of scale against their job creation and public policy standards for their specific loan file that not every lender can offer simply due to our larger loan volume.

If that seems a bit overwhelming, don’t worry, we are here to help! Please note, we only provide SBA 504 loans to businesses in California, Nevada, and Arizona, so if you’re looking for an SBA 504 in one of those states, reach out to us.

At-a-Glance: SBA 504 Loan Project Requirements.

As you learn about the SBA 504, keep these top three eligibility requirements in mind:

• Purchase of commercial real estate and heavy equipment.  The 504 loan program is for the purchase of commercial real estate and heavy equipment. 

• Your business must occupy 51% of the building: If you are purchasing commercial real estate, your business must occupy at least 51% of the property you plan to purchase if it’s an existing building, or 60% of the building if it’s new construction.

• Job creation. Your project (whether for real estate or equipment/machinery) must also meet the specific SBA 504 loan program job creation or public policy goal requirements.

Recommended Reading: Check out our SBA 504 vs 7a Comparison, SBA 504 Rate History, as well as our breakdown on 504 Loans vs Conventional Real Estate Loans. 

What Are The Requirements To Go Green?

If you are looking to help your small business go green using an SBA 504 loan, there’s a few requirements your business will have to meet.

Please note your small business may only have to meet one of these goals for your project to qualify for an SBA 504 green loan.

Your project must:

• Plan on reducing energy consumption by 10% or more
• Incorporate sustainable design elements
• Create renewable energy of some kind
• Be to design and build LEED certified buildings

Work with a loan expert to help you identify if your project is a good candidate for the SBA 504 Green loan.

LEARN MORE

What Are The Requirements For My Small Business Once I Have An SBA 504 Loan?

Once you have secured an SBA 504 loan, there are a few requirements to follow during the life of the loan. It is important to be aware of these, as there are consequences if you do not meet the requirements.

Some of the requirements are:

• Ownership changes of your small business must be approved (in writing) by the SBA beforehand. This also includes control of your business, not just ownership. If you plan to change ownership or release control of your business in the near future before the 10, 20 or 25 year term of your 504 loan, contact us or your SBA 504 lender as soon as possible so our team can walk you through the process and help you stay in compliance.  Your buyer or successor must also qualify under the Small Business Administration’s standards, so this is important to address as soon as you know of any changes.

• Life insurance policies for all key individuals in your business. The death of the business owner or another key individual in your business can greatly challenge the future success of your business. That’s why the SBA will require you to have sufficient life insurance policies for yourself (the small business owner) and any other individuals that are vital to the success of the business. 

• Hazard insurance for your business property equal to the remaining balance of your SBA 504 loan. You’ll have to provide evidence of your hazard insurance to the SBA every year through your SBA lender. This can be pricey when you first get your 504 loan, but your insurance costs will lower over the duration of your loan as you pay down your 504 loan’s principal.  Our protocol is to reach out each year requesting the required documents.

• Proof that you are paying your real estate taxes and any other financial responsibilities. You’ll have to submit your corporate tax return regularly, as well as your annual financial statements.  To keep you in compliance, if we are your lender, we will contact you annually to request your return and statements.

• Any attempts to use the collateral for your SBA 504 loan to secure more financing must be approved by the Small Business Administration first (in writing).

What Are SBA 504 Loan Requirements For Third-Party Lenders?

The financing for every SBA 504 project is provided by a Certified Development Company (CDC) and a “Third-Party Lender.” In most cases, the Third-Party Lender is a recognized financial institution that provides the Third-Party Loan offered within a 504-loan structure, which is usually 50% of the total project cost. 

The Small Business Administration (SBA) does not mandate that the Third-Party Loan come from a recognized regulated financial institution. The SBA defines the Third-Party Loan as “a loan from a commercial or private lender, investor, or Federal (non-SBA), State, or local government source that is part of the project financing.” 

So while it’s rare, the Third-Party Loan could be from an individual or government source.  Being the “Third-Party Lender” for an SBA 504 project may be of interest to a private investor who is seeking a market interest rate return on their money with the security of a first mortgage on commercial real estate with a loan-to-value of around 50%. 

Most CDC’s require the Third-Party Lender to have general lending experience, that it can complete normal and customary documentation associated with issuing and securing collateral for a standard commercial loan and can accept wire transfers. 

If interested contact your local CDC serving your area for more guidelines.

If you are in CA, AZ or NV looking to work with a CDC, please reach out to us.

Feeling overwhelmed? We can help.

If you are interested in an SBA 504 loan for your business, the next step is to connect with one of our SBA 504 loan experts.  Although the requirements can seem overwhelming at first, you can rely on our expert team to answer all your questions and identify the advantages the loan can bring to your business. 

At CDC Small Business Finance, we’ve been helping small business owners get access to capital including SBA 504 loans for over 40 years.

We’ve got an amazing team that will help guide you through the entire SBA 504 loan application process, and even provide free business advising for qualified loan candidates.

Please note, we only provide SBA 504 loans to businesses in California, Nevada, and Arizona, so if you’re looking for a small business loan in one of those states, give us a call.

Otherwise, we highly recommend checking out the Small Business Administration’s online resource that will help you find qualified SBA 504 lenders in your area.

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