An SBA 504 loan is a long-term, fixed-rate loan designed to help small business owners buy real estate or equipment

The SBA 504 program is run by the Small Business Administration in partnership with Certified Development Companies (CDCs) — nonprofit organizations in your area that handle the paperwork and underwriting. The loan itself comes from two sources: a bank provides about 50 percent of the money, and the CDC provides the rest through a bond it sells to investors. You put down 10 percent of your own money.

The main reason businesses use 504 loans instead of a regular bank loan is the terms. You get a fixed interest rate that does not change for the life of the loan, repayment periods of 10 years for equipment or 20 years for real estate, and you do not have to start paying back the bank portion for six months after the loan closes. This structure makes monthly payments predictable and often lower than conventional financing.

504 loans are meant for buying things that stay with your business — a building, land, machinery, or a vehicle used in operations. You cannot use the money for working capital, inventory, or debt payoff. The business must be for-profit, operate in the United States, and meet the SBA's size standards, which vary by industry.

Key Takeaways

  • An SBA 504 loan comes from a bank (50 percent) and a Certified Development Company (40 percent), with you providing 10 percent down.
  • The loan carries a fixed interest rate and a repayment term of 10 years for equipment or 20 years for real estate, making payments stable over time.
  • You can only use 504 funds to buy real estate, equipment, or other fixed assets — not for working capital or paying off existing debt.
  • Your local Certified Development Company processes the loan, not the SBA directly, and you will work with both them and a bank during the process.
  • The business must be for-profit, U.S.-based, and meet size limits that depend on your industry.

How the money is split between lenders

The structure of a 504 loan is different from a conventional bank loan because two lenders are involved. The bank puts up roughly 50 percent of the purchase price. The CDC finances the remaining 40 percent by issuing bonds to investors. You cover the remaining 10 percent with your own cash or a down payment loan from the bank.

This split protects the bank by reducing its risk — the bank gets paid first if something goes wrong, and the CDC's portion is subordinate. It also protects you because the CDC's portion is not recourse, meaning if the business fails and the collateral does not cover the full debt, the CDC cannot come after your personal assets for the remainder. The bank can pursue recourse, so you will still sign a personal may provide for the bank's portion.

Interest rates on the bank portion are negotiated between you and the bank. Interest rates on the CDC portion are set by the SBA and are tied to the bond market, so they change periodically. Both portions have fixed rates for the full term — there are no adjustable rates or balloon payments.

What you can and cannot buy with a 504 loan

504 loans are for fixed assets — things that stay in place or are tied to the business long-term. Real estate is the most common use: buying a building, land, or a facility where you will operate. Equipment is the second most common use: machinery, vehicles, computers, or tools used in production or service delivery.

You cannot use 504 funds for working capital (cash to pay employees or suppliers), inventory, debt payoff, or refinancing existing loans. You also cannot use the money to buy stock in another company or to finance a franchise unless the franchisor is also the seller of the real estate or equipment. The SBA publishes a detailed list of what counts as an may be able to access use, and your CDC will review your intended use before you explore.

The asset you buy becomes collateral for the loan. If you are buying real estate, the building and land are pledged to both lenders. If you are buying equipment, that equipment is pledged as well. The lenders will require a first lien position, meaning they have the first claim if you default.

Typical timeline and costs

From the time you contact a CDC to the time money is in your account usually takes 60 to 90 days, though it can be faster or slower depending on how quickly you provide documents and how busy the CDC is. The process has several stages: initial review by the CDC, bank underwriting, SBA review, loan closing, and funding.

Costs include an SBA may provide fee (paid by you at closing, typically 2 to 3 percent of the CDC's portion), a CDC servicing fee (usually 0.5 to 1 percent of the loan balance per year), and standard closing costs like title insurance, appraisals, and legal fees. These costs are often rolled into the loan amount, so you do not have to pay them upfront in cash. Ask the CDC for a detailed fee schedule before you commit.

The bank portion has no SBA may provide fee because the bank is taking the senior position. However, the bank will charge its own origination fee and require an appraisal. Both lenders will require proof that the business is viable and that you have the experience to run it.

Who qualifies for a 504 loan

Your business must be for-profit and operate in the United States. It must meet the SBA's size standards, which are based on industry. For example, a manufacturing business can have up to 500 employees, while a retail business can have up to 100. The SBA publishes size standards by industry code, and your CDC can tell you whether your business meets the limit.

You must own at least 20 percent of the business (or 51 percent if you are the sole owner). If there are multiple owners, each owner with 20 percent or more must sign a personal may provide. The business must have been operating for at least two years, though there are exceptions for startups in certain situations.

You will need to show that you have the experience and character to run the business. This usually means providing a resume, a business plan, and personal financial statements. The lenders will also pull your credit report and may ask about any past bankruptcies or legal judgments. A low credit score does not automatically disqualify you, but it may result in a higher interest rate or a requirement to put down more than 10 percent.

How a 504 loan differs from other SBA loans

The SBA offers several loan programs, and 504 loans are one of them. The most common alternative is the SBA 7(a) loan, which is a general-purpose loan that can be used for real estate, equipment, working capital, or debt payoff. A 7(a) loan is typically smaller (up to $5 million) and has shorter repayment terms (usually 7 to 10 years for equipment, 25 years for real estate). The interest rate is variable and tied to the prime rate, so your payment can change.

Another option is the SBA Microloan, which is for very small businesses and nonprofits. Microloans are smaller (up to $50,000) and come with technical information. They are not backed by the SBA may provide in the same way, and they are made by nonprofit intermediaries rather than banks.

A 504 loan is best if you want a long repayment term, a fixed rate that will not change, and you are buying real estate or equipment. A 7(a) loan is more flexible if you need working capital or want a smaller loan. Your bank or CDC can help you decide which program fits your situation.

The role of Certified Development Companies

A Certified Development Company is a nonprofit organization authorized by the SBA to process 504 loans in your region. There is usually one CDC per state or region, though some states have multiple. The CDC is not a lender itself — it is an intermediary that packages the loan, sells bonds to raise the 40 percent portion, and handles the paperwork with the SBA.

When you explore for a 504 loan, you will work with the CDC first. They will review your business plan, help you find a bank partner, and guide you through the SBA's requirements. The CDC also services the loan after it closes, meaning they collect your monthly payment on the CDC portion and handle any changes to the loan terms.

To find your local CDC, you can search the SBA's website or call your local SBA office. CDCs are required to serve small businesses in their region, and they cannot turn you away based on industry or location (though they may have specific focus areas). There is no cost to contact a CDC or to have them review your business plan.

Frequently Asked Questions

Can I use a 504 loan to buy a franchise?

Only if the franchisor is also selling you the real estate or equipment. For example, if you are buying a franchise location and the franchisor owns the building and is selling it to you, a 504 loan can work. If you are just buying the franchise rights and leasing space, a 504 loan is not the right tool. Ask your CDC whether your specific franchise situation is may be able to access.

What happens if I cannot make a payment?

Contact your CDC or bank when ready — do not wait. Many lenders will work with you on a temporary payment reduction or deferment if you are having a short-term cash flow problem. If you default and do not cure it, the lenders can foreclose on the collateral (your building or equipment) and pursue a judgment against you personally for any shortfall.

Can I pay off a 504 loan early without a penalty?

The bank portion usually has no prepayment penalty. The CDC portion may have a prepayment penalty if you pay it off within the first few years — this varies by CDC and is spelled out in your loan documents. Ask about prepayment terms before you close the loan.

Do I need a business plan to get a 504 loan?

Yes. Both the bank and the CDC will want to see a business plan that shows how you will use the asset, what revenue you expect, and how you will repay the loan. The plan does not need to be elaborate, but it should be realistic and based on your industry knowledge and market research.

What if my business is seasonal or has uneven income?

Seasonal businesses can get 504 loans, but you will need to show that you have enough income over a full year to cover the loan payment. The lenders will look at your tax returns for the past two years and may ask you to explain how you manage cash flow during slow months. Some lenders may require a larger down payment or a higher interest rate if your income is very uneven.