An SBA 504 loan is a unique financial product that small businesses can use for major purchases like real estate and equipment. SBA 504 loans are unique in that they have three parties: a bank or credit union who contributes 50% of the capital, a certified development company (CDC) who contributes 40%, and the borrower who contributes the remaining 10% as a downpayment.
These loans are important for small businesses because they can be used to purchase or upgrade long-term fixed assets. Small businesses can use an SBA 504 loan for things like real estate for parking lots or buildings, equipment, furniture, and land, but not to simply invest in real estate or to purchase inventory.
The Small Business Administration (SBA) caps SBA 504 loans at $5 million each, but some projects can be eligible for more than one loan. In 2023, the SBA issued over 5,900 SBA 504 loans totaling $6.4 billion.
SBA 504 loans are guaranteed by the Small Business Administration, which works hand in hand with certified development companies (CDCs) to offer these unique loans to small businesses.
Generally speaking, SBA 504 loans can only be used for expenditures that fit certain criteria:
To qualify for an SBA 504 loan, businesses must meet seven criteria:
Most traditional loans are between two parties: a lender and a borrower. SBA 504 loans are unique because they introduce a third party: a certified development company, or CDC. Here is the role each party plays:
While the SBA sets some terms of SBA 504 loans, others are negotiable between the bank or credit union, CDC, and borrower.
For borrowers, the primary benefit of an SBA 504 loan is it allows them to purchase or improve a long-term asset. They receive the favorable rates set by the SBA, and the terms of SBA 504 loans are, by definition, more favorable than the terms they can secure from other institutions.
For lenders, SBA 504 loans are desirable because they represent less risk than a traditional commercial loan. After all, a large percentage of the capital is provided by the SBA via the CDC.
One drawback of an SBA 504 loan is that it can be time-consuming to secure. SBA loans require a large amount of documentation, but FileInvite helps make that process easy.
Here’s the basic process for applying for an SBA 504 loan:
To underwrite your SBA loan, the bank, or credit union, and the CDC will need extensive documentation, including personal and business tax returns for the previous three years, personal and business financial statements, a business debt schedule, and other documents relating to the specifics of your loan.
Unlike traditional loans, SBA 504 loans require the involvement of a certified development company or CDC. Find a qualified CDC to take the next step in preparing your application. Once you’re connected with a CDC, they can guide you through the rest of the application process. The SBA recognizes over 200 CDCs throughout the United States and its territories.
Your CDC will help you fill out the appropriate forms and paperwork to submit your final SBA 504 loan application. In addition to the documents you gathered in step one, your application should also include a description of the project and how the funds will be used.
Applying for an SBA 504 loan involves filling out a lot of paperwork and managing a large number of documents. FileInvite makes this process up to 6x faster with our leading document collection software.
FileInvite's secure file sharing and document collection platform can substantially streamline the SBA 504 loan application and approval process for lenders. By automating the document collection process, FileInvite reduces the administrative workload involved in manually collecting, tracking, and storing documents. It enables lenders to send automated requests for documents and receive real-time updates when documents are submitted by applicants, ensuring no delays in the application process.
To learn more and request a demo, visit FileInvite today.