SBA 504 loan requirements, in plain English
What the program funds, who qualifies, what lenders actually look for, and what happens after closing.
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What a 504 loan can and cannot fund
The SBA 504 program provides long term, fixed rate financing for the fixed assets a business needs to grow: real estate and heavy equipment.
Eligible uses
- Building purchases: existing commercial buildings
- Land purchases, including land with existing buildings
- Land improvements: grading, utilities, parking, landscaping
- New construction: materials, labor, and site preparation
- Renovations and modernization: expansion, remodeling, upgrades
- Long life machinery and equipment with a useful life of 10+ years
- Project soft costs: architects, engineers, appraisals, interest during construction, certain closing costs
Not eligible
- Startup costs
- Business acquisitions
- Working capital
- Inventory
- Investment real estate your business will not occupy
- Certain closing costs, such as legal fees and real estate brokerage fees
Needs beyond fixed assets usually point to an SBA 7(a) loan, which can fund working capital, inventory, and business acquisitions; it can also fund real estate and equipment, though generally at less favorable terms than a 504. See our comparison of SBA 504 vs 7(a) costs to borrowers. Depending on your needs, you may be able to pair a 504 and a 7(a) so each loan covers its allowable expenses.
Who qualifies
Confirming eligibility up front saves weeks. Here is what the SBA requires before a 504 project can move forward.
Business eligibility
- Operates as a for-profit entity (nonprofits are not eligible)
- Tangible business net worth of $20 million or less
- Average net income after taxes of $6.5 million or less over the last two years
- No defaults on federal loans
Prohibited activities
- No passive or speculative activities
- No lending businesses
- No political or lobbying activities
- No gambling or casino operations
- Real estate must be used for business operations, not held for investment
Project and property
- Your business must occupy at least 51% of an existing building, or 60% of new construction
- Loan repayment must come from cash flow generated by the project
- The project must meet job creation requirements or qualifying community development and public policy goals
Owners and guarantors
- All beneficial owners of the borrower must be US citizens
- Personal tax returns and personal financial statements for all guarantors
- No recent bankruptcies or defaults on other government debt
What lenders typically require
The CDC and the SBA follow set eligibility rules, but the third party lender, whether a bank, credit union, or direct lender, makes its own independent credit decision. Two businesses that both qualify under SBA rules can get different outcomes depending on which lender they approach, which makes it important to find a financing partner whose credit standards fit your situation.
Ownership and guarantees
- All owners with 20% or more ownership must personally guarantee the loan.
- Owners must demonstrate good character; unresolved criminal records or federal debt issues are red flags for many lenders.
Financial strength
- Good credit history, both personal and business.
- Cash flow that covers the loan payments. This is where lenders vary the most: many want a minimum debt service coverage of 1.2x or better over several years, while more flexible lenders will consider projections or outside income.
- Three years of business and personal tax returns, plus interim financial statements.
- For startups or expansions, a business plan with financial projections.
Equity contribution
- Typically a 10% borrower down payment.
- 15% to 20% for startups or special purpose properties such as hotels and gas stations.
Collateral and documentation
- An appraisal and environmental report on the real estate.
- A personal financial statement from each owner.
- Organizational documents: articles, bylaws, operating agreement.
- A breakdown of project costs: purchase agreement, construction budget, equipment quotes.
- Completed SBA application forms.
Post closing requirements
After closing, a 504 borrower agrees to stay in compliance with a handful of ongoing covenants. Here are the ones that matter.
Insurance
- Property insurance covering the loan amount or replacement cost, with the SBA named as loss payee.
- Flood insurance if the property sits in a designated flood zone, also with the SBA as loss payee.
- Liability insurance for claims related to the property or operations.
- Life insurance, sometimes required for key principals.
- Workers compensation where state law requires it.
Property taxes
Keep property taxes current. Unpaid taxes create liens that threaten the loan collateral and your standing with the lender.
Annual reporting
Expect to provide business tax returns, personal tax returns, an updated personal financial statement, and management prepared financials each year.
Occupancy
Your business must maintain at least 51% occupancy of the property for the life of the loan. Falling below that threshold can jeopardize the loan status and the SBA guarantee.
Ownership changes
Any change in ownership or control of the business while the loan is outstanding requires prior written approval from the SBA.
If times get hard
If the business hits a rough patch, reach out early. Keeping the lines of communication open with the CDC and senior lender makes a cooperative workout plan far more likely.
Numbers first, bankers later
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- Your estimated blended rate and monthly payment
- Your likelihood of funding, scored 1 to 5
- Estimated closing costs for your project
- The lenders most active in your state
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SBA 504 requirement questions, answered
What credit score do I need for an SBA 504 loan?
There is no fixed SBA minimum. Most lenders want to see solid personal credit, and scores near 680 or better get the smoothest path. Strong cash flow can help offset a thinner score.
How much do I have to put down on a 504 loan?
Typically 10% of the total project. Businesses under two years old and special purpose properties each usually add 5% to the down payment.
Does my business have to occupy the building?
Yes. Your business must occupy at least 51% of an existing building, or 60% of new construction. Passive investment properties are not eligible for SBA financing.
What size projects qualify for a 504 loan?
Projects typically run from several hundred thousand dollars to $20 million or more. The SBA debenture portion is capped at $5 million, or $5.5 million for manufacturers and certain energy projects.
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