How SBA 504 loans work

Unique structure of SBA 504 Two Loan Structure

In this guide, we’ll break down exactly how SBA 504 loans work, how they’re structured, and what makes them different from other SBA loan programs. You’ll also learn best practices to help you get started and position your business for approval.

Unlike SBA 7(a) loans or traditional commercial mortgages, the SBA 504 loan is actually made up of two separate loans working together. While that might sound complex at first, the process is surprisingly straightforward once you understand the structure. This unique setup is what gives the 504 program its biggest advantage: lower down payments, longer repayment terms, and better rates for small business owners.

Two loans: 1 Project

All SBA 504 projects have three components:

1. Borrower Equity – usually 10% of the total project financing
2. Senior Loan – usually 50% of the total project financing
3. Junior Loan – usually 40% of the total project financing

The Senior loan is provided by a bank or private lender. The SBA calls this loan a Third Party Loan or TPL Loan because it is being provided by a lender that is not the SBA. The Senior loan or TPL loan is considered “senior” because it will have a 1st lien position on the collateral (using real estate and/or equipment) being financed.

The Junior Loan is provided by the SBA and is considered junior because it’s lien position is behind the Senior Loan. The Junior loan funded by the SBA is sometimes called a debenture. This is a misnomer though. The SBA funds their loans through selling the pool of loans in the credit markets by issuing what is called a debenture. That’s probably too much information for this short write-up. The main point is that the SBA funds the junior loan.

Example of how a SBA 504 loan works with real numbers

Let’s assume you are a small business owner who has been operating a day-care center in Georgia for the past 5 years and are about to buy a second day-care center. You have the center under contract for $2,000,000. Here is the breakdown of how that would look with a 504:

• 10% – $200,000 Down Payment
• 40% – $800,000 Junior Loan
• 50% $1,000,000 Senior Loan
• TOTAL: $2,000,000

Why borrowers win with the SBA 504 two loan structure?

Understanding how SBA 504 loans work starts with knowing why the program was created. The SBA 504 program was designed to help small business owners access affordable financing—even if they have difficulty getting traditional credit elsewhere. It allows borrowers to secure long-term funding with low down payments while giving lenders a safer way to provide capital.

Here’s how SBA 504 loans work in practice: A senior lender—typically a bank—provides up to 50% of the project’s total cost. Because their exposure is limited, lenders face lower risk, especially since most SBA 504 loans involve commercial real estate.

Why This Structure Benefits Borrowers

• Lower interest rates on the senior loan → Since the bank takes on less risk, these loans typically carry more favorable rates.
• Low fixed rates on the SBA-backed junior loan → The SBA funds the second portion, often at very low, long-term fixed rates.
• Minimal down payment → In most cases, borrowers only need to contribute about 10% in equity, making it much easier to finance larger projects.

By combining these two loans, the SBA 504 program provides an affordable, low-risk path for small businesses to buy, build, or expand commercial property.

The ins-and-outs of how SBA 504 loans a work and get funded.

Now that we have reviewed the structure, how does an SBA 504 loan work to get two loans funded. It may sound complicated but if you choose the right lender and CDC (we’ll explain what a CDC is below) the process mirrors just about any traditional commercial real estate transaction.

A Certified Development Company (CDC) plays a key role in how SBA 504 loans work, especially within the SBA 504 program. The CDC partners with the senior lender—usually a bank or private lender—to coordinate the loan approval process with the SBA. As a 504 borrower, you typically won’t work directly with the SBA; instead, you’ll work closely with a CDC in your state.

The CDC is responsible for collecting documentation, underwriting the loan, and determining eligibility. They also handle key steps in the process, such as hiring a closing attorney to represent both the SBA and the CDC at closing. Even after the loan is finalized, the CDC continues to service the SBA-backed junior loan, making them a vital partner throughout the life of your financing.

What’s a CDC?

CDC stands for Certified Development Company and they are critical to how SBA 504 loans work. A CDC works with the Senior Lender (I.e. a bank or private lender) to get the loan approved by the SBA. As a 504 borrower you will likely never interface with SBA directly, but instead work with a CDC in your state. The CDC will collect the necessary documentation to underwrite the loan and determine eligibility. They will hire a closing attorney to represent them and the SBA at closing and they will service your SBA (i.e. junior loan) after the loan closes.

Who do I contact first- a bank/private lender or a CDC or both?

You shouldn’t have to contact both a lender and a CDC if you reach out to the right lender to begin with – one that knows how SBA 504 loans work! Most small business borrowers will start exploring lending options by reaching out to the bank they currently work with for other services. While it doesn’t hurt to ask, borrowers should be aware that most business bankers will not be familiar with SBA. And the ones that are familiar with SBA will more than likely only have working knowledge of the 7a program only.

We suggest finding a lender that specializes in SBA 504.

Here’s are the benefits of finding a lender that knows how SBA 504 loans work:

The five steps to a SBA 504 loan funding