Short answer: An SBA 504 loan helps an operating business buy or build the property it uses, or buy long-life equipment. The project is usually split into three pieces: a first loan from a bank or other lender (typically about half), a second loan from a Certified Development Company (CDC) backed by the SBA (up to 40%), and the business's own down payment (generally at least 10%). It's built for owner-users, not for investors buying rental property.
The three pieces of a 504 project
Every 504 loan has the same basic shape. Under SBA rules (13 CFR Part 120, Subpart H), a standard project is financed like this:
- First lender, about 50%. A bank, credit union, or other private lender makes a first-position loan on the property.
- CDC loan, up to 40%. A Certified Development Company, a nonprofit certified and regulated by the SBA, provides a second-position loan funded by a debenture backed by the SBA. The SBA describes this piece as long-term, fixed-rate financing.
- Your down payment, generally at least 10%.
The down payment goes up in two situations. If the business has been operating for two years or less, or the property is a limited- or special-purpose building, the business generally puts in 15%. If both apply, it's generally 20%. In those cases the CDC piece is smaller.
What a 504 loan can pay for
According to the SBA's 504 program page, eligible uses include:
- Buying, building, or renovating buildings or land the business will use
- Long-term machinery and equipment with a useful life of at least 10 years
- Refinancing or consolidating certain existing business debt that meets SBA's definition of qualified debt
It can't be used for working capital, inventory, or speculation or investment in rental real estate. If you need working capital, a 7(a) loan, a revenue-based business loan, or an unsecured line of credit may be a better fit.
You have to occupy the building
The 504 program is for owner-users. As a general rule, the business must occupy at least 51% of an existing building it buys with a 504 loan. For new construction, the business generally must occupy at least 60% right away and plan to grow into more of the space over time. Leasing out the remaining space can be allowed within those limits. An investor buying a building to lease entirely to others would look at investor office, retail, or multifamily financing instead.
Who is eligible
The SBA says the business must be an operating, for-profit business located in the U.S., small under SBA size standards, and not an ineligible business type. Lenders and CDCs also look at management experience, a feasible business plan, character, and the ability to repay.
A Washington example
Illustration only, not an actual client. A machine shop in Kent has leased its space for years and wants to buy a small industrial building nearby and occupy all of it. With a 504 structure, a first lender might finance about half of the project, a CDC up to 40%, and the shop would bring the rest as its down payment, plus any costs not financed. Because the business is established and the building is a standard industrial property, the 10% down payment level may apply. Whether it does depends on the underwriting, the property, and the lenders involved.
504 or 7(a)?
Both are SBA programs. A 504 is focused on owner-occupied real estate and major fixed assets. A 7(a) is broader and can cover business acquisition, equipment, working capital, and refinancing. If your plan mixes real estate with working capital or buying a business, the answer may be a 7(a), a 504, or a combination. See the SBA 7(a) and 504 page for a side-by-side overview.
What to have ready
- A short description of the business, how long it has operated, and what it does
- Two to three years of business tax returns and year-to-date financial statements
- Personal financial statements for owners
- The property address, purchase price or construction budget, and how much of the space you'll occupy
- Where the down payment is coming from
A rough outline is enough to start. I personally review every scenario, then work through it with one of NEXA Lending's in-house commercial lenders to see whether a 504, a 7(a), or a conventional loan is the better fit. There's no cost or obligation to submit a deal.
Questions about this topic
How much down payment does an SBA 504 loan require?
Generally at least 10% of the project. It's generally 15% if the business has operated for two years or less or the property is a limited- or special-purpose building, and 20% if both apply. The final amount depends on underwriting.
Can I use an SBA 504 loan to buy a rental property?
No. The SBA does not allow 504 loans for speculation or investment in rental real estate. The business generally must occupy at least 51% of an existing building, or at least 60% of new construction.
Can a 504 loan be used for working capital?
No. Working capital and inventory are not eligible uses. An SBA 7(a) loan or another business loan may cover those needs.
Can I lease part of the building to other tenants?
Often, yes, within SBA limits. The business generally must occupy at least 51% of an existing building, and at least 60% of a newly built one at the start.
Do you help with SBA 504 loans outside Washington?
Yes. We finance commercial deals nationwide, in states where NEXA Lending can legally fund. Send the details and I'll confirm how your state and property fit.
Sources
- SBA: 504 loans
- eCFR: 13 CFR Part 120, Subpart H (Development Company Loan Program, 504)
- 13 CFR 120.870: Leasing project property
General information only, not legal, tax, or financing advice, and not an offer or commitment to lend. Program rules can change; confirm current requirements with the SBA and your lender.
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