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Top Misconceptions About The SBA 504 Loan


Small businesses often face challenges when seeking financing to grow or expand their operations. The SBA 504 loan program is a great option that provides long-term, fixed-rate financing for major fixed assets, such as land, buildings, and equipment. However, there are several misconceptions surrounding the SBA 504 loan program that may prevent businesses from exploring it as a viable option. Let’s debunk some of these myths. 

SBA 504 Key Concerns Addressed

The Loan Process is Long and Complicated

While it’s true that the SBA 504 loan application involves a fair amount of paperwork, it doesn’t necessarily mean it’s lengthy. You can help speed the process along by preparing the necessary documents ahead of time. These include:

  • Tax statements from the past two years (personal and business)
  • Your resume
  • A statement of how long you have been in business
  • A solid business plan 
  • Business credit score (usually through FICO Small Business Reporting Service)
  • Bank statements or other documentation that supports your ability to repay the loan (1 year’s worth)
  • Profit and Loss Statement
  • Balance Sheet
  • Legal documents, like business licenses, articles of incorporation, etc.
  • Environmental impact statement
  • Proof of successfully reaching job creation/public policy goals
  • Proof that the business will or already does occupy at least 51% of the space (60% for new construction projects–see more on this below). 

Your Certified Development Company will assist you in gathering all the necessary documentation and forms required to complete the loan as quickly as possible. With proper planning, you can close on your loan in as little as 60-90 days. 

Only Very Small Businesses Qualify for SBA 504 Loans

Contrary to popular belief, the SBA 504 loan program is not exclusive to micro-enterprises or very small businesses. In fact, businesses of various sizes can qualify as long as they meet the program’s eligibility requirements and size standards, which allow for businesses with up to 499 employees–that’s a fairly sizable business! Eligible businesses can also have a tangible net worth of up to $20 million, and an average net income of $6.5 million. 

This means the SBA 504 loan can accommodate a wide array of businesses, from those with a handful of employees to larger endeavors with hundreds. 

You Have to Occupy the Whole Building or Workspace

Under the terms of the SBA 504 loan, businesses only need to occupy 51% of the property for an existing structure, and 60% for a new build. This flexibility makes the program suitable for businesses looking to expand into larger facilities without committing to full occupancy immediately. It also allows owners to lease additional space to generate revenue that may be used to repay the SBA 504 loan toward other business expenses.

SBA Loans Compete with Conventional Loans

SBA 504 loans work with conventional financing, not against it. In fact, the process depends on the backing of a traditional financial institution, such as a bank, to supply 50 percent of the loan. Your CDC will have a preferred lender they will suggest. Your downpayment amount will depend on the type of project you are financing, but a typical arrangement looks like this:

  • Borrower: 10-15% downpayment
  • CDC: 35-45% of loan funds
  • Bank: 50% of loan funds

The Loan Comes from the SBA

While the SBA guarantees a portion of the loan, the funds themselves come from private-sector lenders and investors. The SBA issues long-term bonds called “debentures,” which are backed by the federal government’s credit and reputation. CDCs seek out investors to buy these bonds and pool funds to provide loans to small businesses. 

This means that your loan is serviced through the CDC and the private lender that is providing the other portion of the loan. You will make repayments to these entities, not to the SBA.

You Cannot Use the SBA Loan to Refinance an Existing Loan

Another common misconception is that SBA 504 loans cannot be used to refinance existing debt. However, businesses can indeed use the proceeds from an SBA 504 loan to refinance existing debt, provided that the original loan was used to finance eligible fixed assets. This option allows businesses to take advantage of lower interest rates or extend their repayment terms, improving their cash flow and financial flexibility.

You can also use the SBA 504 to refinance other SBA loans, such as the 7(a). Again, however, the new loan must be for fixed assets only. No working capital, employee wages, or inventory can be financed with the SBA 504. 

You Cannot Take Out More Than One Loan

On the contrary, you can apply for as many SBA 504 loans as you like, up to a total of $5 million. And, if you are using the funds to make energy-efficient upgrades, you can qualify for up to three separate loans of $5.5 million ($16 million total). To qualify, you must have one or both of the green initiative goals set forth by the SBA:

  1. At least 15 percent of your energy will be from renewable sources, like wind or solar
  2. Your overall energy consumption will be reduced by at least 10 percent. 

Of course, in order to qualify for multiple loans, you will need a robust repayment plan and solid business strategy. Your CDC will help you determine if you are in a position to apply for multiple loans, or if alternate financing would be more advisable. 

CDC Colorado

Now that we’ve addressed some of the common misconceptions surrounding a SBA 504 loan, we hope you are encouraged to reach out and see if you qualify! In Colorado, CEDCO.org is a highly experienced CDC that has helped business owners achieve their dreams for the past thirty years. Whether you are looking to expand to a new location, build from the ground up, or update your HVAC system, we can help you. Call or go online today to schedule a free consultation. 

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504 Loan,Loan Process
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