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SBA 504 Loan: How To Buy Commercial Real Estate With An SBA 504 Loan


The purchase of commercial real estate can be an integral part to a growing small business, but it can also be an expensive one. And when it comes to traditional commercial real estate loans, the interest rates, down payments, and terms are less than ideal. That’s where CDC/SBA 504 loans come in.


The SBA 504 loan program is different than that of the SBA 7(a) loan program in that it actually involves two loans—one from a lender and one from a CDC. A CDC, or Community Development Company, is a nonprofit focused on community economic progress. Additionally, as with other SBA loans, the SBA guarantees a percentage of these loans, which translates to less risk for the lenders and more loan opportunities for borrowers like you.


CDC/SBA 504 loans can be used to purchase commercial real estate that will be at least 51% owner-occupied. Generally speaking, the lender covers up to 50% of the loan, and the CDC covers up to 40%. That leaves 10% of the total loan amount to be covered by the borrower.


What can an SBA 504 loan be used for?


  • Purchasing land and any existing buildings
  • Funding property improvements and renovations
  • Building a new building
  • Buying fixed assets like long-term equipment/machinery
  • Refinancing debt


While SBA 504 loans are commonly known as commercial real estate loans, they can also be used to assist with other fixed assets like equipment and machinery. That being said, these loans cannot be used for working capital, materials or inventory, advertising/marketing, normal operational expenses, rental properties. The aforementioned uses would better align with an SBA 7(a) loan.


What’s so good about an SBA 504 loan?


When it comes to funding fixed assets, SBA 504 loans have a lot of great features.


Interest Rates

The interest rates associated with SBA 504 loans are considerably lower than those of traditional commercial real estate loans. The CDC portion of a loan has a set interest rate between 3-4%. The other part of the loan covered by the traditional lender doesn’t have limits set by the SBA, but these interest rates still usually fall between 5-7%. These loans boast some of the lowest interest rates around, especially when compared to the interest rates of traditional commercial real estate loans (50-10%).


Down Payment

As previously mentioned, SBA 504 loans usually require around a 10% down payment. Comparably, traditional commercial real estate loans require 20-40%.



Usually, the fixed assets being funded by the 504 loan count as collateral, which translates to no additional collateral being needed.



SBA 504 loans have longer repayment terms than other modes of financing, with the CDC portion boasting a 10-year term for equipment and a 20-year term for real estate. The portion of the loan funded by the other lender generally has a 7-year term for equipment and a 10-year term for real estate. A traditional commercial real estate loan has payment terms ranging from 5-10 years; additionally, borrowers can fall victim to rate resets.


What are the qualifications to getting an SBA 504 loan?


  • Credit score
  • Proof of payment ability
  • Clean financial history (and limited debt)
  • Net worth less than $15 million and average net income of less than $5 million
  • Use of funds must create jobs or enhance goals put forth by SBA
  • Existing buildings will be 51% owner-occupied and purchased equipment/machinery has an expected life of 10 years or more


What does this list of requirements mean for you? It means that if you’re looking to purchase land and/or buildings as a real estate investment, the SBA 504 loan is probably not the one for you. The commercial real estate in question can be partially rented out, but the rule for 51% owner occupancy disables potential borrowers from renting out more than the allotted portion of any existing building. Furthermore, buildings constructed under loan funding must be at least 60% owner-occupied upon completion, with an expectation of 80% owner occupancy within ten years after completion. So yes, that means that only 20% of a constructed building can be leased out.


Additionally, beyond the actual technicalities of the commercial real estate itself, there is the added emphasis placed on job creation and community economic development. Beyond all of the personal and business qualifications, SBA 504 loans require a borrower to prove the creation or continuation of jobs that would otherwise be lost. The rule of thumb is that for every $65,000 of loaned money, one job must be created or retained. This number is bumped up to $100,000 for small manufacturers.


If you don’t think job creation goals are realistic for you, there is still the potential for your commercial real estate loan to help further other public policy goals emphasized by the SBA. Some of these public policy goals include the expansion of exports, the success of minority-, women-, and veteran-owned businesses, as well as energy efficiency and the production of energy. SBA loans are a great route for minority- or women- owned businesses, grabbing close to half of all SBA 504 loans in 2017.


What do typical SBA 504 loan amounts, rates, and fees look like?


Generally speaking, SBA 504 loans are used for ventures over $500 thousand. Think of it this way: lenders are less inclined to fund smaller projects due to the fact that they only finance up to 50% of the loan, meaning a considerably smaller payout. The maximum loan amount for SBA 504 loans is roughly $14 million.


SBA 504 loans come with servicing and guarantee fees, but the total interest rates range from 3-6%. So no matter what, borrowers face much lower interest rates than conventional bank loans. However, the fact that SBA 504 loans are funded by two different entities makes it a little more complicated. The portion of the loan from the traditional lender has few limitations, while the portion of the loan from the CDC has pretty strict rates, terms, and fees. First, let’s take a look at the portion of the SBA 504 loan funded by the traditional lender.


As previously mentioned, the terms of the lender portion of the loan can vary, but typically the lender portion of the loan has a 5-10 year term amortized over 20-25 years. The interest rates can reset after 5 years, which means the rates could go up (or down, or not change at all). And while monthly payments will be smaller due to the longer repayment terms, there is almost always a balloon payment due within the first 10 years, requiring a borrow to either bay the remaining balance or refinance the loan. The balloon payment can be made more difficult for borrowers that have seen a large depreciation in their property, as refinancing the loan will likely be harder. For this reason, an SBA 7(a) loan could be a good option for a borrower looking to avoid potential balloon payments. GoSBA loans has streamlined the entire application for both SBA 7(a) and 504 loans, so no matter what, we’ve got you covered.


Now, let’s move on to the CDC portion of the loan. This portion of the loan has an SBA guarantee fee (.914% of loan), a servicing agent fee (.1% of loan), and a CDC fee (.625-2.00% of loan). The CDC fee has a range put forward by the SBA, but the particular CDC lender can choose within those bounds.


The interest rates vary depending on the terms. For a 10-year loan term, the interest rate is around 2.13% (5 year treasury) + .38%, and for a 20-year loan term, the interest rate is about 2.25% (10 year treasury) + .48%.


Additionally, there are a few fees—processing fee, legal fee, funding fee, debenture underwriting fee—that become part of the loan and repaid over the life of the loan, usually totaling 2.5-3.0% of the total loan value.


Like a typical mortgage, prepayment penalties still exist in the realm of SBA 504 loans. The prepayment penalty varies depending on loan amount and terms, but it decreases over time and is based on the debenture interest rate of the loan.


How do I get an SBA 504 loan?


To begin the process of getting an SBA 504 loan, you should find a traditional lender (national bank, community bank, credit union, etc.) and a CDC to work with. It can be helpful to inquire about previous partnerships between potential banks and CDC’s to help expedite the process. Not all banks are excited about SBA 504 loans; often times it’s seen as a loss. Instead of the typical 80%, a traditional lender entering in to an SBA 504 loan only funds 50%. This means the payoff is not nearly as lucrative. Furthermore, the whole process can be slowed by the addition of another lender into the mix. That being said, SBA 504 loans SBA 504 loans are on the rise, and there are plenty of banks and CDC’s to work with. Using an SBA loan marketplace like GoSBA Loans helps mitigate a lot of these issues.


While SBA loans are known for a large amount of paperwork, it is actually very comparable to a traditional commercial mortgage. The time required for the application process can be greatly reduced by using GoSBAloans.com. Instead of fumbling around in the dark for lenders and CDC’s that fit the bill, GoSBA Loans can do the research for you (and take most of the begrudging work off you hands).

Ishan Jetley

Ishan Jetley is the founder and managing director of GoSBALoans. Ishan has helped fund more than 400 businesses. He has helped businesses raise $150 million in SBA working capital, inventory and commercial property loans.

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