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

The SBA 504 loan is structured differently from other SBA loans. Instead of borrowing directly from a bank, you work with a Certified Development Company (CDC) — a nonprofit organization that partners with the SBA and a conventional lender. The CDC borrows from the SBA, the bank lends you money separately, and you end up with two loans that together fund your purchase.

The real advantage is the terms. A 504 loan typically carries a fixed interest rate, a long repayment period (10 years for equipment, 20 years for real estate), and a smaller down payment than a conventional loan would require. You'll put down 10 percent for real estate or equipment purchases; the bank covers 50 percent; the CDC covers 40 percent through an SBA-backed loan.

504 loans are meant for buying, not for working capital or inventory. If you need cash to run your business day-to-day, this is not the right tool. But if you're buying a building, expanding your facility, or purchasing machinery, a 504 can be significantly cheaper than a conventional loan over the life of the loan.

Key Takeaways

  • A 504 loan comes as two separate loans: one from a bank (50 percent of the project cost) and one from a Certified Development Company backed by the SBA (40 percent), with you providing 10 percent down.
  • Interest rates are fixed for the entire loan term, which is typically 10 years for equipment or 20 years for real estate, making monthly payments predictable.
  • You can use 504 funds only for real estate, equipment, or leasehold improvements — not for working capital, inventory, or debt repayment.
  • Your business must be for-profit, operate in the United States, and meet the SBA's size standards for your industry; nonprofits and certain businesses do not may have access to.
  • The Certified Development Company in your state or region handles the application process and works with your bank to structure the deal.

What You Can and Cannot Buy With a 504 Loan

504 loans cover real property — land and buildings — and equipment. Real property includes purchasing a building to operate your business from, constructing a new facility, or making permanent improvements like adding a loading dock or renovating the interior. Equipment includes machinery, vehicles used in production, and tools that are permanently attached to the property.

You cannot use a 504 loan for working capital, inventory, accounts receivable, or paying off existing debt. You also cannot use it to buy a business from another owner (that's what SBA 7(a) loans are for). If you need cash to operate the business or stock shelves, you'll need a different loan product.

Some purchases fall into a gray area. Leasehold improvements — renovations you make to a space you rent — can be financed with a 504 if the lease term is long enough (usually at least as long as the loan term). Ask the Certified Development Company whether your specific purchase qualifies before you invest time in the application.

Who Can Borrow and Size Limits by Industry

Your business must be for-profit and operate in the United States. You must own at least 20 percent of the business (or 51 percent if you're applying as a business owner, not an investor). Nonprofits, religious organizations, and government agencies do not may have access to.

The SBA sets size limits based on your industry. For most manufacturing and wholesale businesses, the limit is 500 employees. For retail and service businesses, the limit is usually $7.5 million in annual revenue. Construction companies, farms, and other industries have different thresholds. Your Certified Development Company will verify your size when you apply.

If your business is too large for a 504, you may still be able to borrow through an SBA 7(a) loan or a conventional loan. The CDC can tell you whether you meet the size standard for your specific industry.

How the Two-Loan Structure Works

A 504 loan involves three parties: you, a bank, and a Certified Development Company. The bank provides a conventional loan for 50 percent of the project cost at a rate negotiated between you and the bank. The CDC borrows from the SBA and lends you 40 percent of the project cost at a fixed rate set by the SBA (which changes monthly). You contribute 10 percent of the cost as your down payment.

You make two separate monthly payments: one to the bank and one to the CDC. The bank's payment may have a variable rate or a fixed rate depending on your agreement; the CDC's payment is always fixed. Both loans are secured by the asset you're buying — if you default, both lenders have a claim on the property or equipment.

The CDC handles most of the paperwork and works with your bank to structure the deal. You don't apply to the SBA directly; you work through the CDC in your state or region. The CDC also monitors your loan after closing to make sure you're using the funds as promised.

Interest Rates and Fees

The CDC's portion of the loan carries a fixed interest rate set by the SBA each month. As of the time this guide was written, that rate typically ranges from 6 to 8 percent, but rates change regularly. The bank's portion is negotiated between you and the bank and may be fixed or variable.

You will pay an SBA may provide fee (usually 3 percent of the CDC loan amount) and a CDC servicing fee (typically 0.5 to 1 percent per year). These fees are built into the loan or paid upfront; ask the CDC for a full fee schedule before you commit. Some CDCs charge application fees; others do not.

Because the interest rate on the CDC portion is fixed and typically lower than a conventional loan rate, the total cost of a 504 loan is often less than a conventional loan over 20 years, even with the fees included. Run the numbers with both your bank and the CDC to compare.

Timeline From Application to Funding

The process typically takes 60 to 90 days from the time you submit a complete application to the time you close and receive funds. The timeline depends on how quickly you provide documents, how straightforward your financial situation is, and whether the property or equipment appraisal raises any questions.

You'll start by contacting a Certified Development Company and submitting a preliminary application with basic business and personal financial information. The CDC will do an initial review to confirm you meet the size standard and that your project qualifies. If you pass that stage, you'll work with the CDC and a bank to complete a full application, which includes personal tax returns, business financial statements, a business plan, and an appraisal of the property or equipment.

Once the bank and CDC approve the loan, you'll move to closing, where you sign documents and the funds are disbursed. The CDC disburses its portion directly to the seller or contractor; the bank does the same. You do not receive the money as cash.

Finding a Certified Development Company in Your Area

The SBA maintains a directory of Certified Development Companies on its website. Search by state to find the CDC that serves your region. Most states have multiple CDCs, each covering a geographic area. Contact the CDC that covers your county or city.

When you call, have your business type, the amount you need to borrow, and the type of asset you're buying ready. The CDC will tell you whether your business and project meet the basic requirements and what documents you'll need to gather. Many CDCs have a preliminary application you can fill out online or over the phone to get a quick sense of whether you're a fit.

If the CDC in your area is not taking new applications, ask whether another CDC in your state can help. Some CDCs have waiting lists; others may refer you to a different lender or loan product.

Frequently Asked Questions

Can I use a 504 loan to buy an existing business?

No. A 504 loan finances the real estate or equipment, not the business itself. If you're buying a business and want SBA financing, you'll need an SBA 7(a) loan, which can cover the purchase price of the business, inventory, and working capital. A 504 can be used alongside a 7(a) if you're buying both the building and the business.

What happens if I can't find a bank willing to lend the 50 percent?

The CDC can sometimes help you find a bank partner, but they cannot force a bank to lend. If you're having trouble, ask the CDC whether they have relationships with banks that regularly participate in 504 loans. You can also approach your own bank or credit union. If no bank will lend, you may not be able to proceed with a 504 at that time.

Do I have to use the funds within a certain timeframe?

Yes. The CDC will require you to close on the property or equipment purchase within a set period, usually 120 to 180 days from loan approval. If you haven't closed by then, the loan commitment expires and you'll need to reapply. The CDC monitors how you use the funds after closing to ensure they went toward the stated purpose.

Can I refinance a 504 loan later?

You can refinance a 504 loan, but the terms are not the same as the original loan. The SBA allows refinancing if interest rates drop significantly or if you want to extend the term. Talk to your CDC about refinancing options if your situation changes.

What if my business is seasonal or has uneven income?

The bank and CDC will look at your average income over time, not just your best month. If your business is seasonal, bring tax returns and financial statements that show a full year or multiple years of operation. Be prepared to explain how you'll make loan payments during slow months.