SBA 504 Construction Program Overview

If you’re a small business owner planning to build, renovate, or purchase commercial property, an SBA 504 construction loan could be a smart financing solution. Backed by the U.S. Small Business Administration, these loans offer long-term, fixed-rate funding with lower down payment requirements than traditional commercial loans. In the sections that follow, we’ll break down the key eligibility criteria and requirements to help you decide whether an SBA 504 construction loan is the right fit for your business goals.

SBA 504 Construction Loan Benefits

So, why consider an SBA 504 loan for your construction or renovation project? Here are some standout benefits:

• Lower down payments – You could get started with as little as 10% down, which means you can keep more of your working capital available for day-to-day operations or other investments.

• Long-term, fixed-rate financing – With repayment terms of 20 to 25 years and a fixed interest rate, you’ll have stable, predictable monthly payments—no surprises down the road.

• Competitive interest rates – SBA 504 loans typically come with lower rates than conventional commercial construction loans, which can add up to significant savings over time.

• Flexibility – Whether you’re building from scratch, doing major renovations, or expanding an existing facility, the SBA 504 program is built to support a wide range of real estate projects.

Bottom line: if you’re planning a construction or renovation project, the SBA 504 loan offers a smart, cost-effective way to make it happen—without putting unnecessary strain on your cash flow.

How to Use an SBA 504 Loan for Construction or Renovation Projects

How the Construction Financing Works

When you close on the property, your senior lender (the first mortgage lender) will typically provide a short-term construction loan. This loan is used to pay contractors and cover project costs as work progresses. Once construction is complete and the Certified Development Company (CDC) has verified everything, the permanent SBA 504 loan is funded.

Here’s how it works in practice: your senior lender and the CDC will secure SBA approval for the loan before closing. However, the SBA-backed portion of the loan doesn’t actually fund until the construction or renovation is finished. That means your lending partner needs to cover the full cost of the project during the build phase. Once the project is complete and fully documented, the permanent financing replaces the short-term loan.

The terms, eligibility, and general requirements for an SBA 504 construction loan are mostly the same as a standard SBA 504 loan—but with a few key differences, which we’ll break down next.

Owner-Occupancy Rules Are a Bit Different for New Construction

Normally, with an SBA 504 loan, your business needs to occupy at least 51% of the space. But for ground-up construction, that requirement bumps up to 60%. You’re allowed to permanently lease out 20% of the space to other tenants, and temporarily lease another 20%. Just keep in mind, you’ll need to start using that temporarily leased space for your own business within three years—and fully occupy it within 10 years.

You’ll Need to Share Your Plans and Costs Upfront

Since these projects are more complex, both the CDC (Certified Development Company) and your lender will need to see your construction plans and cost estimates during underwriting. This helps them figure out the full scope of your project and how much financing you’ll need.

Appraisals and Final Checks

Before construction starts, an appraiser will estimate the current value of the property (“as-is”) and what it will be worth once the project is done. After construction is complete, the appraiser (or the contractor, architect, or project manager) must confirm the building was finished according to the original plans—aside from any minor changes.

The CDC will also review all your invoices and proof of payment to confirm every part of the project has been paid for.

What’s a Debenture, and Why Does It Matter?

For more details on the unique structure of SBA 504 loans check out our article on “How SBA 504 Loans Work” 

Once everything is in order, you’ll get your SBA 504 loan funding through something called a debenture. Unlike traditional banks that fund loans from their own accounts, CDCs raise money for these loans by selling debentures—basically a type of bond. These are sold to investors in the financial markets and help fund the SBA-backed portion of your loan.

 SBA 504 Construction Loan Challenges

An SBA 504 approval doesn’t always guarantee a lender will be willing to take on a construction or renovation project.   Despite the SBA’s participation, a construction loan has inherent risks compared to an SBA loan being utilized for purchase or refinance only.   Here are some of the reasons why many traditional bank lender will not do construction projects:

Why Some Lenders are Hesitant to Finance SBA Construction Loans:

• • • Higher risk – Construction projects are unpredictable with potential delays, cost overruns, and permitting issues.

    • No existing collateral – The property doesn’t yet exist or is under renovation, making it harder to secure the loan.

    • Ongoing oversight required – Lenders must manage draw schedules, review invoices, and monitor progress—time-consuming and complex.

    • Delayed cash flow – Properties under construction typically don’t generate income, making repayment less certain in the short term.

    • Limited SBA guarantee – The SBA backs only a portion (usually 40%), leaving the lender exposed on the rest.

    • Specialized expertise needed – Not all lenders are equipped to handle the complexities of construction financing.

What documentation will I need for my SBA 504 construction loan?

You will need all the standard documentation that is required for any SBA 504 loan.

SBA 504 Complete Loan Application Checklist

In addition, to the standard checklist above most SBA construction lenders will require the following  construction related documentation:

1. Construction agreement ( we reccomend an AIA standard form or equivalent).
2. Contract documents including drawings:

• • • • Architectural (Title Sheets, Plans, Elevations, Sections, Finishes, Details, Schedules, etc)
      • Mechanical (Heating, Ventilation, and Air Conditioning)
      • Electrical (Power, Lighting, Signal)
      • Plumbing (Domestic Water, Fire, Sanitary, Gas, Air, etc).
      • Civil (Site Plan, Utilities, Demolition, Grading, Storm Water, Landscaping, etc)
      • Structural (Foundation, Framing, Sections, Details, etc)Schedule of Values or cost breakdown
      • Critical Path Schedule in Flow Chart Form

       

      3. Contractor’s Qualification Statement .
      4.  Utility Verifications – If Applicable
      5.   Geotechnical Report for new Ground-up construction.

      Every lender is different so these requirements will vary based on lender, location and scope of project.   Regardless, most lenders will need well developed plans and budgets to issue an approval.

      How to Get Started on your SBA 504 Construction Loan

      If you think an SBA 504 conssturction loan might be right for you, now is a great time to take the next step. Our SBA 504 loan experts are here to help you explore your options, assess your eligibility, and guide you through the process.

      Get started by connecting with one of our specialists today—we’ll help you understand what documents you’ll need, and ensure you’re set up for success from day one.

       

Ready to Begin the SBA Loan Process?

Get started on your SBA 504 loan today and take the next step toward business growth.

Call Us at 1-855-504-LOAN

Contact APC Lending today to learn more about the SBA 504 Loan Program and take the first step toward building long-term success for your business.

SBA Construction Loan FAQs