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How Long Does It Take to Apply for an SBA 504 Loan?
Discover the process of applying for an SBA 504 loan, with details on eligibility and necessary paperwork. Expect an average application timeline of 2-3 months.
SBA 504 loans are specialized financial products designed to give small businesses capital to purchase or invest in long-term fixed assets. These unique loans are structured differently than most traditional loans and typically have more advantageous terms for both the borrower and the lender.
That’s because SBA 504 loans involve three parties: the borrower, the lender, and the Small Business Administration (SBA). The lender only provides 40% of the funding, the borrower provides another 10% in the form of a downpayment, and the SBA provides the remaining 50% via a Certified Development Company (CDC).
The net result of this unique structure is that lenders bear less than half the risk they would otherwise, and borrowers enjoy a smaller-than-average downpayment and favorable terms. In 2023, the SBA 504 loan program issued over $6 billion in loans, over $3 billion of which went to Black- and Latine-owned small businesses.
The SBA designed its 504 loans to strengthen small businesses and promote growth, but obtaining these desirable loans requires some effort on the business's part. Small businesses must provide extensive documentation including both business and personal tax information, and that documentation takes time to gather and process. While there’s not a fixed timeline for SBA 504 loan approval, the entire process can take as long as 6 months, though 2-3 months is more typical.
How to Prepare an SBA 504 Loan Application
Before you start gathering documents, it’s helpful to set realistic expectations. First, let’s discuss the eligibility criteria you must meet to obtain an SBA 504 loan.
Am I Eligible for an SBA 504 Loan?
The primary eligibility criteria for SBA 504 loans are as follows:
- Your business must operate for-profit in the United States (or its territories).
- Your business can’t engage in passive or speculative activities.
- Since SBA 504 loans target small businesses, your company must have a tangible net worth of less than $15 million.
- You must also have an average after-tax net income of less than $5 million over the last 2 years.
Aside from these product-specific eligibility requirements, businesses must also meet their lender and CDC’s specific underwriting requirements. The lender will have their own underwriting guidelines relating to your character, standing, and ability to repay the loan. However, since the CDC contributes 50% of the funding, lenders are more likely to approve SBA 504 loans for businesses that meet the SBA’s criteria.
What Documentation Do I Need to Obtain an SBA 504 Loan?
One of the obstacles businesses face in obtaining an SBA 504 loan is simply the volume of documentation they must provide to obtain approval. While each lender may have their own requirements, the sort of documentation businesses must generally provide includes:
- Both business and personal tax returns for the past three years
- A personal history statement, financial statement, and budget analysis
- Business financial statements for the past three years
- A business debt schedule
- An interim financial statement (including both a balance sheet and income statement signed and dated within the past two months)
- Accounts receivable and accounts payable aging reports from within the past 2 months
- Your complete business plan
- One year of financial projections
As well as other situation-specific documentation:
- Hotels and Motels: Revenue and expense breakdowns, occupancy percentages for the past year, and the average daily rate for the area
- Construction: A written estimate from a contractor
- Franchises: A letter of intent from the franchisor.
- Buying Another Business: The business owner’s tax returns for the past 3 years, interim finance statements, and a signed purchase agreement with cost breakdowns
Completing the SBA 504 Application Process
SBA 504 loans require extensive paperwork and documentation, but don’t let this discourage you—the process is relatively straightforward.
Step 1: Locate a CDC
The CDC is a vital element of your SBA 504 loan. The SBA works with over 200 different CDCs across the United States.
While you are still responsible for completing the application process, your local CDC should guide your journey. The CDC can direct you on how to fill out application paperwork, help you identify a qualified lender, and support you along the approval process.
Step 2: Gather Documentation
With the CDC’s guidance, you can begin gathering the documentation we discussed in the previous section. This step is often a major hurdle for small businesses because of the labor involved in creating, gathering, and transmitting this paperwork.
Document portals can make it easier to gather and submit paperwork.
Step 3: Properly Fill Out the SBA 504 Application
The SBA 504 loan application is broken into four sections:
- Section 1: Information about the applicant’s business and its ownership structure, and is filled out by the applicant.
- Section 2: Filled out by each associate of the applicant, e.g., in a general partnership, all partners must fill out this section of the form, while a sole proprietor only fills it out.
- Section 3: Disclosures and statements required by law. The applicant must sign to acknowledge these disclosures.
- Section 4: This is completed by the CDC.
Step 4: Review and Underwriting
Once you submit your application and preliminary documentation, the CDC and SBA will review your application. This step of the application process takes around a week for SBA approval plus an additional 2-3 weeks for due diligence.
During this stage, the CDC and lender may request further documentation based on their underwriting criteria. Since each CDC and financial institution has its own underwriting criteria, this is one of the factors that cause the loan application time to fluctuate. Depending on your documentation needs and the labor required to produce them, this could add from several days to several months to the loan application process.
If you’re using loan funds to purchase or renovate real estate, you may also need to conduct an environmental assessment to determine the impact the loan will have on the environment, as well as an appraisal to determine the value of the property.
Step 5: Closing and Funding the Loan
Once your loan has been underwritten and approved (typically at least a month after application submission), you’re now ready to close on your loan.
This process typically takes 2-3 weeks, during which time you’ll coordinate disbursement timelines and finalize loan terms with the lender and the CDC.
It typically takes 2-3 months to apply for an SBA 504 loan, but it can take as long as 6 months depending on your unique situation.
Plan for Success
In Step 4: Review and Underwriting, the parties to the loan have to produce and process a large amount of paperwork. When the financial institution or CDC doesn’t have the documents they need, that can cause significant delays in your application process—even doubling or tripling the time it takes to obtain an SBA 504 loan.
Taking a proactive approach to the application process can cut down on unnecessary wait time and resources. In fact, FileInvite’s document collection tools save their users an average of 10.5 hours per week. Applying for an SBA 504 loan doesn’t have to be difficult or stressful if you prepare your documentation ahead of time, go into the application process with good expectations, and use the right lender with efficient tools to process the application.
Streamlined SBA 504 Processes with FileInvite
SBA 504 loans are unique products designed to help small businesses purchase or improve long-term fixed assets like real estate, equipment, and parking lots. While there’s no one-size-fits-all timeline for the application process, completion of all the steps typically takes 2-3 months.
FileInvite simplifies and streamlines the document collection process. We already work with dozens of CDCs and qualified lenders to significantly speed up the loan application process. 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.
Importantly, FileInvite enhances compliance through its secure portal, which is designed to handle sensitive financial documents, providing both encryption and access control. This is crucial for maintaining the security of the applicant's personal and business information. By integrating with existing lender systems and offering a single portal for document management, FileInvite minimizes the potential for errors and omissions, leading to a more efficient approval process.