SBA 504 loans

How it works

The SBA 504 program supports qualifying fixed assets through a structure involving a Certified Development Company and a third-party lender. Project eligibility and borrower contribution requirements need to be assessed as a complete transaction.

Where it can fit

Think of longer-lived business assets such as qualifying commercial property and equipment. The project budget should distinguish the asset purchase from operating cash, because a fixed-asset program is not a general-purpose revolving working-capital facility.

Look closely at the trade-offs

Confirm occupancy, project, ownership, and other current program requirements with a CDC. Fees, appraisals, environmental review, closing conditions, and interim financing can affect the project’s timetable and cash needs.

Budget the asset and the cash needed around it

The 504 program focuses on qualifying fixed assets. SBA’s borrower guidance distinguishes those projects from working capital and inventory, which the program does not finance. That makes a complete project budget especially important: buying a building can create moving costs, downtime and inventory needs that still require another funding source. Ask a Certified Development Company to assess the project before relying on a particular financing split.

Source: SBA: 504 loans

Worked example: the building is not the whole project

A fictional manufacturer budgets $900,000 for premises and $100,000 for eligible-looking improvements. It also expects $40,000 of moving expenses and $60,000 of working capital while production restarts. Total business cash needs are $1.1 million. Even if the first $1 million were accepted as an eligible project, the remaining $100,000 needs a separate plan. This example does not establish eligibility or a required borrower contribution.

Suppose the owner has $180,000 available. If a proposed fixed-asset financing package requires $150,000 from the owner, only $30,000 remains for the additional $100,000 requirement. The business would still have a $70,000 gap before other closing costs. Showing this early lets the CDC, lender and owner discuss the whole transaction rather than discovering an operating shortage after the property closes.

Ask who funds each stage

A multi-party transaction needs a calendar as well as a budget. Identify who makes the first advance, what evidence is needed, when any interim financing is repaid and when the long-term components close. If construction is involved, map cost changes and completion conditions to the financing documents. Do not assume approval of one component guarantees the others.

Compare the full payment schedule, including any third-party lender component, instead of considering one advertised rate in isolation. Confirm asset use, occupancy and business eligibility with the CDC using current rules. Bring your accountant and legal adviser into the transaction while there is still time to revise the purchase agreement and financing conditions.

Create a decision log for the property or equipment purchase. Record which items are confirmed, who must approve each remaining condition and the latest date for that decision. Include the buyer’s right to walk away or renegotiate under the purchase contract as a question for counsel. A funding timetable becomes much more useful when it is compared with the dates on which deposits become nonrefundable or the business becomes obliged to complete the purchase.

• Which project costs qualify, and which are excluded?
• What total cash contribution is required for this specific project?
• Is interim financing needed, and what happens if closing is delayed?
• What are the combined payments and remaining balances at each maturity?

Your next-step checklist

• Complete project budget
• Property or equipment details
• Borrower contribution evidence
• CDC and lender requirements