Purchasing commercial real estate or equipment is critical for many business owners. However, it can be difficult to obtain traditional financing if your business is still in its early stages. For startups and new small businesses, one of the best options is the U.S. Small Business Administration 504 loan program, which was developed to address this situation.

Kyle Jensen, Community Banking relationship Manager for Zions Bank, shares insights on the SBA 504 loan program and how it can benefit your business.

Why Choose an SBA 504 Loan?

The SBA 504 loan can be used to build a new facility, buy an existing structure, purchase machinery and equipment and finance modifications to existing facilities. Because these are major capital expenses, the 504 loan is structured to make it feasible for borrowers.

“A borrower may provide as little as 10% equity, with the remaining 50% provided by a bank and 40% by a Certified Development Company backed by an SBA guarantee,” explains Jensen. “The SBA portion of a 504 loan is capped between $5 to $5.5 million, but there is no limit to the total project cost if the borrower meets the SBA’s eligibility criteria.” 

What are the benefits of an SBA 504 Loan?

Business owners who leverage an SBA 504 loan can typically expect the following benefits:

• Fixed interest rates that are highly competitive — often at prime rate or below
• Repayment terms of up to 25 years
• Predictable, long-term financing that helps improve cash flow
• Ability to roll closing costs and architectural or permit fees into the loan
  

“When you make a long-term commitment to your target market, it’s often more cost-effective to purchase property instead of renting,” said Jensen. “An SBA 504 loan provides predictable, fixed monthly expenses and can help mitigate the rising cost of rent.”

What are the requirements of an SBA 504 Loan?

A business must meet the following criteria to qualify for an SBA 504 loan:

• Operate as a for-profit company in the U.S. or its possessions.
• Have a tangible net worth of less than $15 million.
• For the two years preceding the SBA 504 loan application, have an average net income of less than $5 million after federal income taxes.
  

“After meeting the basic requirements, there are other factors the SBA considers,” said Jensen. “The SBA evaluates the borrower’s management experience, the feasibility of the borrower’s business plan, the character of the borrower and the extent the loan will promote business growth and job creation. You’ll want to work with an experienced lender who can help you articulate these factors in your loan application.”

In 2023, the SBA made changes to expedite the application process for borrowers.

Previously, lenders used nine factors to evaluate potential borrowers. This has now been cut to three distinct criteria: The credit score or credit history of the applicant, associates and guarantors; the earnings or cashflow of the applicant; and, when applicable, any equity or collateral of the applicant.

“Because of these changes, it’s now easier to obtain an SBA 504 loan — which can help mitigate uncertainty with future expenses and allow you to start building equity,” said Jensen. “If you want to build a stronger future for your business, now is the time to apply.”

Ready to purchase or refinance your business property? For a limited time, Zions Bank is offering a special promotional rate on owner-occupied commercial real estate loans. Visit your local Zions Bank branch to speak with an experienced banker and learn more.