SBA 504 Loan Requirements

SBA 504 loan requirements: Loan Uses

The SBA 504 Loan Program helps small business owners secure affordable, long-term, fixed-rate financing to buy, build, or upgrade real estate and equipment needed for expansion.

What can I use SBA 504 loans to fund?

The money from an SBA 504 loan can be used to purchase land, buy a building, finance ground-up construction or building improvements, or purchase heavy machinery and equipment.

Typically, 504 loans are applied to the following expenses:

• • Building Purchases – existing commercial buildings.
  • Land Purchases – including existing buildings.

  • Land Improvements – grading, street improvements, utilities, landscaping, and parking lots.

  • New Construction – including costs of materials, labor, and site preparation.

  • Building Renovations or Modernization – expansion, remodeling, or upgrading facilities.

  • Long-term Machinery & Equipment – must have a useful life of 10+ years.

  • Soft Costs (project-related) – such as professional fees (architects, engineers, appraisals), interest during construction, and certain closing costs.

     SBA 504 loans are made available through Certified Development Companies and offer a number of advantages over commercial loans and other SBA loans such as SBA 7a for those who qualify.

What can I not use SBA 504 loans to fund?

You can’t use 504 funding for any expenses other than the fixed assets listed above.

• Start-up costs
• Business acquisition
• Working capital
• Inventory
• Investment Real Estate (i.e. non-owner occupied real estate)
• Some closing costs do not qualify such as legal costs to close the loan and real estate brokerage fees.

If you do have financing needs beyond the fixed assets listed above there are other options such as a more general purpose loan such as an SBA 7a loan, which cab be used for working capital, invetnroy and business acquisition.

The SBA 7(a) loan will also fund real estate, machinery and equipment costs – although, at generally far less favorable terms than SBA 504 loans. Check out our article comparing SBA 504 vs 7a costs to borrowers.

Also, keep in mind that depending upon your needs, you may be able to secure both a 504 loan and a 7(a) loan at the same time so that each loan covers allowable expenses.

If you aren’t sure which SBA loan program is the best fit for you, we’d love to help. We’re experts in helping small businesses get the funding they need as quickly and easily as possible.

SBA 504 loan requirements: Borrower Eligibility

If a borrower meets the eligibility criteria, securing an SBA 504 loan is a straightforward process designed to support small business growth. With clear requirements around business size, use of funds, and job creation or public policy goals, qualified applicants can access long-term, fixed-rate financing with relative ease.

Carefully reviewing the SBA 504 eligibility criteria is essential before starting the application process. Borrowers who overlook these requirements risk spending significant time and effort gathering documents, preparing a business plan, and engaging lenders, only to discover later that their business or project is not eligible. By confirming upfront that you meet the SBA’s financial, operational, and project criteria, you can avoid wasted time and move forward with confidence toward securing financing.

Business Eligibility

• Must operate as a for-profit entity (nonprofits are not eligible).

• Business net worth must not exceed $15 million.

• Average net income after taxes for the last two years must be $5 million or less.

• Must not have defaulted on a federal loan.

Business Activities (Prohibited Uses)

• Cannot be engaged in passive or speculative activities.

• Cannot be engaged in lending.

• Cannot be involved in political or lobbying activities.

• Cannot be involved in gambling or operate a casino.

• Real estate purchased must be used for business operations, not held for investment.

Project & Property Requirements

• Must plan to occupy at least 51% of an existing building or 61% of new construction.

• Loan repayment must come from cash flow generated by the project.

• Must meet job creation requirements or, alternatively, community development/public policy goals.

Guarantor Requirements

• All beneficial owners of the small business borrower must be US Citzens.

• Must provide personal tax returns and personal financial statements for all G

• No recent bankruptcies or defaults on other government debt.

SBA 504 loan requirements: What lenders typically require

In an SBA 504 loan, the Certified Development Company (CDC) and the SBA follow set eligibility rules, but the third-party lender (a bank, direct lender or credit union) makes its own independent credit decision. Each lender may have different underwriting criteria, such as required credit scores, collateral coverage, debt service ratios, or industry preferences. While the SBA sets broad eligibility and guarantees part of the loan, the third-party lender must still be comfortable with the borrower’s financial strength and risk profile. This means two businesses that both qualify under SBA rules might get different outcomes depending on which lender they approach, making it important to find a financing partner whose credit standards align with your situation.

Here are some of common lender requirements for SBA 504 loans:

SBA 504 loan requirements: Post Closing

After you close your SBA 504 loan there are a number of requirements to ensure you stay in compliance with loan convenants and representations borrowers will be required to make in order to close.   Here are the key post closing SBA 504 loan requirements.

Insurance 

• Property Insurance:
  SBA 504 loan requirements entail Borrowers must maintain adequate hazard insurance on the financed property, typically covering the loan amount or replacement cost. SBA must be named as a loss payee on the policy.

• Flood Insurance:
  If the property is in a designated flood zone, flood insurance is required, with SBA also named as a loss payee.

• Liability Insurance:
  General liability insurance is often required to protect against claims related to the property or business operations.

• Life Insurance:
  Sometimes required for key principals or owners, especially if their involvement is critical to the loan.

• Workers’ Compensation Insurance:
  Required if the borrower has employees, per state law.

Property Taxes

Timely payment of your property taxes is essential to protect your loan collateral and maintain good standing with your lender. Keeping your taxes current helps avoid any unexpected liens that could complicate your SBA loan.

Ongoing Reporting

As with almost any commercial real estate loan SBA 504 lenders require at minimum annual updates on the business.  Here are the documents you should be prepared to provide each year after closing:

• Business Tax Returns
• Personal Tax Returns
• Updated Personal Financial Statement
• Management prepared Financials

Occupancy 

For SBA 504 real estate transactions borowers must maintain at least 51% occupancy of the property for their own business to stay in compliance with SBA 504 loan requirements. Falling below this threshold could jeopardize the loan’s status and SBA guarantee.

Ownership Changes

Any changes in the ownership or control of the business while an SBA 504 loan is outstanding would require prior approval from the SBA.  It’s important to note that this approval applies not only to formal ownership changes but also to changes in control of the business. Additionally, the SBA’s consent must be documented in writing.

Hardship

Sometimes businesses hit difficult patches.   If your business is having a hard time keeping up with it’s obligations to lenders (including timely payment of insurance and property taxes), the best thing to do is reach out  early.  Keep the lines of communication open with the CDC and senior lender and you are more likely to find a willingness to cooperate with you on a workout plan.   

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.