How Hard Is It To Get An SBA 504 Loan?

Getting an SBA 504 loan is not, has never been, and is not designed to be easy.

It’s a government-backed business loan that comes with a string of eligibility criteria, usage rules, and funding splits.

It is intended to stimulate economic development by allowing businesses that fit a set of established criteria to buy real estate and other fixed assets, while financing up to 90% of the cost of the purchase through a loan which can run for either 10 years (if it’s for equipment) or 25 years (if it’s for real estate), at significantly lower rates than many business loans, starting at 2.5%.

How Hard Is It To Get An SBA 504 Loan

That means there are some very serious and very stringent criteria to meet before you get an SBA 504 loan. There are some reasonable grounds behind this difficulty in the process.

The government has to be seen to be acting responsibly with taxpayer’s money, and it must be seen to be getting something for that money – in the case of the SBA 504 loan, a nominal commitment to employ or retain staff for a percentage to the SBA-secured loan money.

The difficulty of getting an SBA 504 loan breaks down into two sections, the Who You Are criteria, and the What You’ve Done criteria. We’ll come to those criteria in a moment, but first, let’s take a look at what the pathway to an SBA 504 loan looks like.

The Pathway To An SBA 504 Loan

  1. If you want an SBA 504 loan, first, you need to be a business owner with funds. This, for the purposes of the SBA, is not as simple as it sounds.
  2. Second, you have to have a project in mind. Whether you’re buying new facilities, premises, equipment, or other fixed assets. Get your project proposal put together, because before you try to get an SBA 504 loan… there’s stage 3 to complete.
  3. Because the SBA 504 is a loan of last resort, rather than a loan of first opportunity, if you eventually want to be considered for an SBA 504 loan, you first have to take your proposal to every traditional lender you can imagine. Only when every traditional lender has rejected your plan, meaning there is no other financial option, do you qualify to apply for an SBA 504 loan.
  4. If your project proposal has been universally rejected by traditional lenders, it’s worth considering whether you meet the two sets of criteria for an SBA 504 loan – Who You Are and What You’ve Done.
  5. If you’re convinced you qualify for an SBA 504 loan, you then need to find yourself a local certified development company (CDC) and fill in a loan application with them.
  6. In the event that your application gets approved, you will have to make a down payment of 10% of the total project cost to unlock the rest of the funding. If you don’t believe your company can do that – and more to the point if a rigorous scrutiny of your business’s finances doesn’t support the idea that you can do that – you probably won’t be successful in getting your loan.
  7. If you can and do make the down payment, your CDC will then provide up to 50% of the projected costs, and the SBA will deliver up to 40%.
  8. You then use the pooled funds to invest in the fixed assets you specified were the reason for the loan – and in no other assets with these pooled assets.

As we said, the process of getting an SBA 504 loan is not supposed to be easy. But it is supposed to be rigorous.

Who You Are – Pre-Application Criteria, Route #1

To qualify for an SBA 504 loan, the SBA has some stringent criteria on who you should be.

  • You should run a business for-profit. The business should be in active operation and should have been actively operating for at least 2 years before your SBA 504 application.
  • Your business can be active in almost any sector, but it must not be engaged in speculation.
  • Your business must have a tangible net worth of not more than $15 million.
  • Your business must show an average net income of not more than $5 million (after federal income taxes) for the two years before you make the loan application.

All of this is to show your prima facie seriousness as a business owner so that the SBA can legitimately say it believed you were a good business investment, capable of running an active company.

Who You Are – Pre-Application Criteria, Route #2

If the Route #1 criteria are too tough for you to meet, there’s no need to despair just yet. The SBA can justify granting you an SBA 504 loan if your project idea meets any one of a number of public policy goals.

If your business involves: 

  • Improving, diversifying, or stabilizing a local economy
  • Stimulating other business development
  • Bringing new income into a community
  • Revitalizing a business district of a community
  • Expanding exports
  • Expanding women-, minority-, or veteran-owned businesses
  • Aiding rural development
  • Increasing productivity and competitiveness (retooling, robotics, modernization, competition with imports) 

you might still be able to qualify for an SDA 504 loan, even if you don’t meet the criteria of business experience for Route #1

What You Do Criteria

Assuming you meet all the Who You Are criteria for either a Route #1 or Route #2 application, how do you go about physically getting an SBA 504 loan?

That’s significantly more straightforward than at least qualifying for one under Route #1. It’s still not what you’d call an easy process, but it is at least mapped out easier than achieving the two years of profitability you need to qualify for a Route #1 SBA 504 loan.

Here’s what you do.

1.    First, understand your investment.

As with any loan, have your goals in mind before you file your application. Know the project, know its costs, its potential for community benefit, its ins and outs – and be able to explain them clearly.

In a sense, this is a tightrope to walk, because on the one hand, if you’ve tried to go Route #1, since you need to have tried to get traditional funding before you go down the SBA route, you’ll have all this together from presenting it to potential lenders.

On the other hand, since you need to have been refused traditional lending for the project, it’s worth double-checking your facts and figures before presenting them to any SBA-approved lender.

2.    Get your business in order.

Whichever SBA-approved lender you go with, they will need to be sure of your business’s stability. You should collect:

  • The business's current balance sheet.
  • 2-3 years of business tax returns.
  • A breakdown of who owns the company and how that ownership is divided.
  • The financial records of anyone who owns more than 20% of the company.
  • And ideally 2 years of payroll records.

3.    Find your CDC and file your application with them

Once your application is filed with your chosen CDC it will be subject to a thorough financial inspection.

4.    Find a conventional SBA lender to underwrite your contribution to the project. There are few stipulations on who or what this lender is, but it cannot be your CDC.

5.    Between yourself and your lender, submit your application for the SBA financing.

6.    Close on the loan.

7.       Commit your business’s 10% of the total project funding to unlock the contributions from the lender and from the SBA.

8.       You must also commit to a job-creation or retention commitment of 1 job for every $65,000 of SBA funding if you’re a medium or large business, or 1 job per $100,000 if you’re a small business.

As you can see, there are many steps and many hurdles to overcome in getting an SBA 504 loan. On the other hand, businesses apply for these loans every day. Pick a route, and start gathering your business information early and you can streamline the process as much as possible.

Oddly enough, while you’re required to have a history of some 2 years of business dealings for a Route #1 SBA 504 loan, the process of applying for the loan shouldn’t take too long once you begin.

From the moment you compile your project proposal, through getting your business’s accounts and prospects vetted and finding both your CDC and your SBA-approved lender, the process usually takes around 6 months, meaning it’s often the Who You Are criteria that are harder to fulfill than the What You Do section.