What You Can and Can’t Use SBA 504 Loans For

By: Jack Knatch

What Is an SBA 504 Loan?

More than 50 years ago, the U.S. Small Business Administration designed the SBA 504 Loan to provide financing for small businesses at affordable below-market rates. This loan program is also known as the Certified Development Company program. The SBA 504 Loan got its name because originally it was in Section 504 of the Small Business Investment Act of 1958.

SBA 504 business loans are divided among three parties. The business owner pays a minimum of 10% down, and the remainder is split between a conventional lender (such as a bank) and a CDC (your local Certified Development Company).

What You Can Use SBA 504 Loans For

SBA 504 loans are great for startups and small businesses that are looking to grow. Businesses can get a loan for fixed assets up to $5 million USD. Here’s what you can use a 504 loan for:

Real Estate

You can use SBA 504 loans to buy the property where you plan to have your business facility. If used for existing real estate (land or buildings), the borrower is required to use at least 51% of the property for its own operations within the first year of ownership.

Construction or Improvement of a Building

Business owners may use an SBA loan to build a new building, as long as the borrower plans to occupy at least 80%. You can also improve land using an SBA loan, whether it’s new property or already owned by your business. This may mean converting a facility for your use, modernizing a dated building, or renovating to suit your needs.

Machinery and Equipment

You can use an SBA 504 loan to buy machinery for long-term business use. New or used long-life machinery and equipment is eligible for a 504 loan. The loan can also cover the cost of installation.

Small Business Administration 504 loans are great because they offer long-term, fixed-rate financing for small businesses. The aim is to promote business growth and job creation. SBA loans generally have low fees and a reasonable down payment. If you have a small business or you’re starting one, it could be a great opportunity to get good, fixed-rate financing.

What You Can’t Use SBA 504 Loans For

While you can use SBA 504 loans for a variety of projects, property, and equipment, there are some limitations involved.

If a business’s tangible net worth is more than $15 million or the after-tax profit for the last two years exceeds $5 million, it won’t be eligible for an SBA 504 loan. Businesses also may not be engaged in nonprofit, passive, or speculative activities.

Additionally, you cannot use 504 loans for:

  • Working capital
  • Purchasing inventory
  • Investing in real estate
  • Consolidating or repaying debt
  • Refinancing debt (unless you qualify for the 504 refinancing program)

If you’re looking for a loan for any of these applications, you will need to find a different type of loan. Luckily, there are many other options out there when it comes to financing.

At Help With My Loan, our goal is to help you reach yours. Get in touch today to chat about SBA 504 loans or other small business loans. We’re here to guide you through the process from start to finish!

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