sba 504 loan requirements
Sep 11, 2019

Small businesses need a steady source of capital to pursue future business plans.

When cash is low, a small business loan is a viable option.

Small Business Association, or SBA, loans are designed to meet a variety of objectives.

SBA loans range from the more common SBA 7(a) and SBA 504 to the SBA Microloan.

There are many differences between SBA 7(a) and 504 loans that you should be aware of.

For example, the SBA 7(a) loan is for small businesses that have the credit required but don’t qualify for a typical loan.

For this reason, an SBA 504 loan is particularly advantageous.

Below, we’ve outlined SBA 504 loan requirements that you should know before applying for a loan.

The SBA 504 Loan

Understanding Loan Structure

First and foremost, it’s important to understand the structure of an SBA 504 loan.

The loan itself encompasses three parts:

  1. A down payment
  2. A Certified Development Company (CDC) contribution
  3. A bank or private sector’s contribution

The business owner will typically pay a down payment of up to 10% of the loan’s total funding. Then, the CDC funds approximately 40% of the total loan. Lastly, a private lender will contribute the funds for the remaining 50%.

There are a few special circumstances in which this ratio shifts and the down payment is increased. This applies to “special purpose properties,” which the SBA defines as the following:

“A limited-market property with a unique physical design, special construction materials, or a layout that restricts its utility to the specific use for which it was built.”

SBA SOP Policy Changes, 2017

If your business fits the SBA’s definition of a special purpose property, your down payment may increase to 15%. Each section of the loan also adjusts accordingly. Typically, the second lender will still contribute 50%, while the CDC’s contribution will adjust with a change in the down payment percentage.

SBA 504 Loan Requirements

For your 504 loan to be considered, the SBA requires your company to meet the following eligibility requirements.

(Each has been grouped into three categories you must analyze in your business to meet the necessary loan requirements.)

Review Business Characteristics

Your business is for-profit.

To elaborate, this means that your business is operating under the goals of making a profit. For context, a non-profit is typically not interested in revenue that is not necessary to keep the organization running.

You do business in the United States.

Your business can fulfill this requirement in a variety of ways. If your business has a physical presence—like a storefront in the United States—then you would be considered as doing business in the US.

You must be a part of the U.S. market as well as following the commerce laws in place by the country to do business there.

Your business net worth is under $15 million.

If your company’s net worth exceeds $15 million, you may not meet this requirement. To know if you meet this requirement or not, you must understand how to estimate the net worth for your company.

Your net worth is equal to your book value. To know what your book value is, you can subtract your company’s liabilities from its assets.

Identify Current Financial Engagement

Your business is not engaged in certain investments.

This stipulation is referring to investments you cannot be engaged in to be eligible for an SBA 504 loan. For example, one can not be involved in rental real estate and apply for an SBA 504 loan.

Having an organized system for financial bookkeeping can assist in keeping track of what engagements a business currently has.

Your business does not have funds from other sources.

The SBA considers funds from other sources to be potential alternatives to an SBA 504 loan. These sources include funding coming from the company itself as well as an individual owner.

This SBA requirement is directly related to its overall goal and mission. To elaborate, the SBA’s mission is to ‘start, build, and grow businesses.’ 

In summary, if your company appears to have the financial support to cover all expenses, the SBA will not consider you eligible.

To know if you meet this requirement, review any funding you may currently have.

Your last two years of income has been under $5 million after taxes.

This requirement is straightforward. For the past two years, has your business income equaled $5 million or less?

To calculate your business income, review your business’s overall revenue. Then, deduct any operating costs you may have, as well as other expenses. At this point, you have your revenue before taxes have been deducted. The last step is to subtract your taxes, and that’s your business income.

Analyze Business Credit History

Your business shows the ability to repay the loan on time

To meet this requirement, show your company can sustain itself with your projected operating cash flow. In addition, you must show that you can pay your loan in a consistent and timely manner.

The SBA has created a downloadable and customizable tool to calculate your projected operating cash flow.

Good character

To determine this requirement, the SBA uses what is called a Statement of Personal History form. The Statement of Personal History examines several items. In part, it audits any outstanding legal grievances against you.

Also, the statement examines the criminal background of the company’s owners and executive officers. To demonstrate, an offense that the SBA may consider a red flag is parole.

The SBA considers good character to determine loan responsibility. In general, responsibility is considered the proper use of loan funding.

Relevant management expertise with a practical business plan

Finally, the SBA will scrutinize company leadership. This step in the process assesses if the company’s leadership has the appropriate experience to handle and repay the loan.

Characteristics of accountable leadership include relevant business experience, and a robust understanding of the company’s vision, goals, and future.

Receive the Funding You Need Today

Applying for an SBA 504 loan can be tedious and overwhelming work. Nonetheless, this is a necessary step to progress your business plans.

Apply for an SBA 504 loan with confidence!

AVANA Capital’s skilled team has the knowledge and experience to successfully guide you through the process of applying for this loan.

Learn further about how AVANA Capital can help you achieve your business goals with an SBA 504 loan.


For more information about an SBA 504 loan, or other types of SBA loans, make sure to contact AVANA Capital today. One of their team members will reach out to you shortly.

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