How Does the SBA 504 Loan Process Work?

If you’re a small business owner looking to finance real estate or equipment purchases, the SBA 504 loan program could be a great option for you. This loan program is designed to provide long-term, low-interest financing for these projects. These loans are popular for small businesses because they enable asset financing and often have lower down payments than traditional business loans.

Introduction to the SBA 504 Loan

Before we dive into the details of the SBA 504 loan process, let’s take a brief look at what this loan program is all about. Simply put, the SBA 504 loan program is a type of financing designed to help small businesses purchase or improve fixed assets like real estate or equipment. This program is unique because it involves a partnership between a small business borrower, a Certified Development Company (CDC), and a traditional lender like a bank or credit union. By working together, these parties can provide businesses with long-term, fixed-rate financing that might not otherwise be available.

Benefits of the SBA 504 Loan

There are several benefits to choosing an SBA 504 loan for your small business needs, including:

  • Lower Down Payments: SBA 504 loans require a lower down payment (usually 10-20% of the total project cost) than conventional business loans, making it easier for business owners to obtain financing.
  • Competitive Interest Rates: With a government-backed loan like the SBA 504 loan, borrowers can enjoy competitive and fixed interest rates for the loan term, which can help save money in the long run.
  • Long Repayment Terms: SBA 504 loans offer more extended repayment terms (up to 25 years for real estate and up to 10 years for equipment), making the monthly payments more manageable for small business owners.
  • Asset Financing: SBA 504 loans enable small businesses to obtain necessary fixed assets, such as real estate or equipment, which can ultimately contribute to business growth and expansion.

Eligibility Requirements

To qualify for an SBA 504 loan, businesses must meet specific eligibility criteria, including:

  • The business must be located in the United States and be considered a small business as per the SBA’s definition. This generally means your business has less than $15 million in net worth and less than $5 million in annual profit after tax profits.
  • The business must be an eligible type of business (certain financial and passive businesses may not be eligible).
  • The business must demonstrate viable repayment ability.
  • The proceeds from the loan must be used for eligible purposes, such as purchasing fixed assets or refinancing existing fixed assets.

Steps in the SBA 504 Loan Process

Now that you understand what the SBA 504 loan program is, let’s take a closer look at the steps involved in the loan process.

Step 1: Prequalification

The first step in the SBA 504 loan process is to work with a Certified Development Company (CDC) like Alloy for prequalification. Your CDC will request several forms from you including three years of personal and business tax returns, interim financials, and a personal financial statement. After review, your CDC will confirm your eligibility, find out how much you can expect to receive, and determine how much down payment you’ll need.

Step 2: File Application

Once you are prequalified, you’ll connect with your Alloy representative to review terms and file an application. Usually, your purchase contract will have a Financing Contingency that gives you time to get your financing approvals in place. Often, the Financing Contingency is around 45 days, but you can discuss this with your broker and CDC.

Once you complete the application, an Alloy loan officer takes over to complete the underwriting and ensure the application is complete and ready for the SBA. Note that an appraisal and environmental review are required by the SBA and your partnering lender. These will be ordered and submitted to the SBA for approval (along with your application).

Step 3: Approval

Once ready, your application will be sent to the SBA for approval.

Step 4: Closing

Once approved, it s time to close and take ownership of your property. Alloy and your partnering lender will prepare the loan documentation to send to your escrow officer. Once they have what they need, you can schedule a time to sign the documentation and close escrow.

Step 5: Loan Rate is Locked Down

Note that Step 5 will not take place until all construction or renovations are completed, if applicable.

With application approval and escrow being closed, your long-term, below-market fixed rate loan gets locked down. It can take 1-2 months for this to happen. Once it is completed, you ll be notified of your final below-market loan rate.

Note that a bridge loan is used to cover SBA s portion of your loan until the debenture is funded. Once the loan has been funded, the bridge loan is replaced by your permanent 25-year below market loan. As a borrower, you can allow Alloy to handle this part of the process.

Step 6: You’re Finished!

Once the loan rate is locked down, you’re ready to start doing business. You’ll receive your loan payment schedule about 1 week before your first payment is due. Note that no two loans are alike, so it’s hard to say exactly how long it will take to provide your financing. Usually it takes 60 days a period (which is comparable or better than most bank loans). As your trusted CDC, Alloy is here throughout the process to answer questions, provide updates, and help you reach your goals.

Tips for a Successful SBA 504 Loan Process

As with any type of financing, there are certain things that you can do to increase your chances of success when applying for an SBA 504 loan. Here are a few tips:

The Importance of Timely Documentation

One of the most important things that you can do to ensure a smooth loan process is to provide timely documentation to your CDC. Your CDC will need a variety of documents from you throughout the loan process, including financial statements, tax returns, and other business documents. It’s important to provide these documents promptly to avoid any delays in the approval process.

Maintaining Open Communication with the CDC

Another key to success is maintaining open communication with your CDC throughout the loan process. If you have questions or concerns, don’t hesitate to reach out to your CDC for guidance. Your CDC is there to help you navigate the loan process and ensure that everything goes smoothly.

Learn More with Alloy Commercial Capital.

If you seek an economic development partner to grow your business, look to Alloy Commercial Capital. Our team has extensive experience in SBA lending and have helped finance over $1 billion in projects. As the largest SBA 504 lender in Ohio and Kentucky, we value our role as a certified development company, and when you work with us, you ll benefit from our passionate commitment to your ideas, your business, and your vision.

Let us help you start the SBA 504 Loan process today, and contact us to learn more.


SBA 504 Loan Process FAQs

Contact the CDC to discuss your financing needs and determine if you qualify for the SBA 504 loan program. If you meet the general criteria, the CDC will guide you through the application process, which includes preparing necessary documentation, such as business tax returns, financial statements, and financial projections.

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