Everything You Need to Know About SBA 504 Loans


You’ve decided to start your own commercial construction project and raised some funds, but what do you do next to get your project started and begin profiting? The next step may in fact be the most important hurdle to clear to get your project up and running. That is because you will need to secure a loan that is right for you.

There are several types of Small Business Administration (SBA) loans that may be available to you, but you will likely only be choosing between the two most popular: the SBA 504 loan and the SBA 7a loan.

When should you choose an SBA 504 loan over a 7a loan?

Although the SBA 7a loan is the most common type of small business loan, the SBA 504 loan may be the best choice for you if you are investing in a hotel construction project.

While a 7a loan can be used for a wide range of purposes, including for hotel construction projects, a 504 loan is a better fit for large-scale projects that require bigger sums of money. If you are interested in buying an existing building, constructing a new building from the ground up, or purchasing heavy machinery and equipment, it may be in your best interest to look into a 504 loan.

SBA 504 loan eligibility requirements

Because SBA 504 loans typically involve large sums of money being financed, there are certain requirements that you must meet before you can obtain this type of loan. These eligibility requirements include:

  • Your business operates as a for-profit company

  • You are proposing to do business in the U.S.

  • You have a net worth of less than $15 million and an average net incomes less than $5 million after taxes per year for at least the past two years

  • Your business must be an eligible type of business (most types of business qualify for 504 loans, but there are a few exceptions)

  • You must plan to use the proceeds for an approved purpose, such as financing real estate or equipment

  • You must not have the funds available from other sources

  • You must have the ability to repay the loan on time from projected operating cash flow of the business

  • You must present a feasible business plan and relevant management experience

  • You must be of “good character,” and submit a statement of personal history in order to prove this

Additionally, a 504 loan cannot be made to a business engaged in speculation or investment in rental real estate.

For an SBA 504 loan to be used to purchase real estate, it must be at least 51% owner occupied. You do not qualify for this type of loan if you wish to purchase a hotel to rent out to tenants. However, you may qualify for this loan type if you are renting out less than half of the space.

SBA 504 loan details

Now that you know that SBA 504 loans are generally used when purchasing land, making large improvements, constructing new facilities, and acquiring heavy machinery, you probably want to know the general terms of an SBA 504 loan.

A 504 loan features a fixed interest rate and requires a 10% down payment from the borrower. Half of the loan amount will come from the bank, while the remaining 40% of the loan will be financed by a bank certified development company (CDC). Terms can be 20 years for real estate, and 10 years for equipment. This type of loan should typically not exceed $13-$14 million in total.

The maximum amount the CDC can provide to the loan is $4-$5.5 million. In many cases, the max will only be about $4 million, but if your business can meet job creation goals, the CDC may provide a maximum of about $5 million. Keep in mind, this means your business must create at least one job for every $65,000 lent -- or you could be lent this amount if you meet community development goals such as expanding exports, rural development, and creating minority business development.

You could be lent the maximum $5.5 million by the CDC if your business project meets public policy goals for reducing energy and using alternative fuels.

The current interest rate for SBA 504 loans ranges anywhere from about 3.78% to 5.39%. If you want to know the most accurate interest rates for hotel construction loans, we recommend you speak to one of our experts at SBA Expert.

How to apply for a 504 loan

The application process for any SBA loan is very complex, which is why it is best to speak to an expert before you begin the process. Our experts at SBA Expert can guide you through this meticulous process so that you choose the right type of loan for you and prepare an application that will help you obtain the amount needed to move forward with your project.

In order to apply for an SBA 504 loan, you will need to complete:

  • The SBA loan application form

  • A statement of personal history (SBA form 912)

  • A personal financial statement (SBA form 413)

  • A business financial statements, which include:

  • Profit and loss statement

  • Projected financial statements

  • A list of ownership and affiliations, including names and addresses of any subsidiaries

  • A copy of your business license

  • A loan application history

  • Signed personal and business federal tax returns from the last three years

  • Personal résumés for each principal

  • A brief history and overview of your business

  • A copy of your business lease

If you are attempting to obtain a loan so you can purchase an existing business, there are a few additional steps to the application process.

Speak to SBA Expert Funding about SBA loans today

Are you ready to begin your commercial real estate or hotel construction project? The first step you should you take is to secure an SBA loan. But this is a very complex process. That is why you should contact our commercial real estate loan officers at SBA Expert today.

Our skilled professionals have years of experience helping clients successfully apply for SBA loans, and we could help you next. We will meet with you to discuss your dream project, and explain which type of loan will be best for you. We will then help you navigate the application process.

At SBA Expert, we have a network of commercial lending firms and extensive knowledge of what it takes to acquire an SBA 504 loan. If you’re interested in obtaining a commercial real estate loan, you should talk to our lending experts right away. Call SBA Expert today at 949-439-1423 so we can begin helping you achieve your dream.

#VijayNaik #SBA504 #CommercialRealEstateLoans #Financing

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