Who Qualifies for an SBA 504 Loan?

When it comes to navigating the world of SBA loans, it can leave many of us with a crippling headache, especially when it comes to SBA 504 loans.

It isn’t always clear who qualifies for what loan and how to apply for it. And when you need the money most, the last thing you want to do is spend your days searching the internet, desperate for help.

Thankfully, that's where we come in to save the day! We have all the answers you need when it comes to qualifying for an SBA 504 loan!

We will recap what a 504 loan is and who qualifies for it to help you know which loan is best for you and get your application sorted!

Without further ado, let’s get into it!

What is an SBA 504 loan?

For those in the room that needs a refresh, let's take a quick look at what an SBA 504 loan is! An SBA 504 loan comes from the US Small Business Administration (SBA) and offers a loan to small businesses in need.

The program provides business owners with the chance to purchase assets, usually some real estate, buildings, and machinery, at lower rates than the market average, allowing them to save some money!

It was called the SBA 504 as it was created by section 504 of the Small Business Investment Act in 1958. It has since been codified at 15 U.S.C.

The loan helps promote the business, generating a larger revenue and success for the new or small business.

The 504 program works by sharing your loan across the parties. The business owner puts in a minimum of 10%, a lender; usually, a bank puts in 50%, and the Certified Development Company (CDC) puts in the remaining 40%.

CDCs are developed under the SBA 504 program as non-profit companies that support economic growth in local areas.

These CDCs can be seen across the country, and you can apply for your SBA 504 loan at your local CDC office or online in some cases.

You will need to repay the loan, and this is all outlined in your loan agreement. We have a whole article dedicated to what an SBA 504 loan is, be sure to check it out here if you need further information.

Now that we have outlined what an SBA 504 loan is, let’s get into who qualifies for the loan!

Who qualifies for an SBA 504 loan?

To qualify for an SBA 504 loan, there are criteria that you need to meet. You will need to be a for-profit business that is located and trades in the United States. The business

You will also need to meet the SBA small business size standards for the industry your business is based in and complete a “credit elsewhere” test.

This test determines that the business cannot qualify for similar financings elsewhere, such as other business loans or schemes.

The business itself you are applying for the loan for must have a net worth of less than 15 million dollars.

For the two years before you apply for the SBA 504 loan, the average net worth should not be more than 5 million dollars after you have paid federal income taxes.

These figures are used to prove that your business is a small business and therefore warrant the help of the Small Business Association.

To qualify for an SBA 504 loan, the business must be on all federal, state, and local taxes. These include income taxes, payroll taxes, sales taxes, and real estate taxes.

It’s worth noting that it's not an exhaustive list, so ensure your business is paying its taxes correctly before applying for the 504 loan.

Once you have met these criteria, there are also financial requirements that you must meet. To be successful for an SBA 504 loan, the lender needs proof that you can repay the loan without relying on any company’s liquidation.

There are a few things they look at to ensure you and your business meet the criteria.

Usually, a financial analysis will be undertaken to determine that you can afford the repayments of the loan. Historical income statements, tax returns, and a two-year projection are taken to determine this.

Financial statements are also analyzed, along with trends and comparisons of the industry averages, to ensure the business is viable and that the loan will help the business progress.

A description of the owner’s and manager’s experience in the industry will be required. Any experience that CDC has had with the business will also need to be listed.

You will also be required to provide a credit history or undergo credit checks as part of the loan application. There’s no minimum score required, but usually, approved loans will have a credit score of 650 and higher.

The credit score of the owners and the business will be taken into consideration.

Your loan application can be subjected to other checks, which are usually done on a case-by-case business.

Usually, extra checks are done to understand the business better and ensure that you can make the repayments. After all, the SBA and other lenders are going to want their money back!

There must also be at least one economic development objective that your business meets.

The objective can include job creation or retention, assisting businesses impacted by a base closing, energy savings, sustainability, renewable energy, or other specific situations. 

It’s best to find the objective that best suits your business and ensure that you have proof of it when applying for your loan.

How long does it take for an SBA 504 loan to be approved?

Typically, the turnaround time for an SBA 504 loan is between 30 to 90 days. You can expect your application to be considered, approved and the necessary paperwork and fees settled within this time.

After this time, the funds will be approved and released to purchase the necessary space and equipment for your business to continue trading and expanding.

There are exceptions, of course, and times where it will take longer, but generally, you can expect to know if your loan is approved within 90 days.

Due to COVID-19, more small businesses are seeking financial support, and it can take longer for your loan to be approved. As the situation improves, we can expect the wait time to decrease.

Is it hard to get an SBA 504 loan?

Now, you might be thinking that all sounds tricky and complex; it must be hard to qualify for the 504 loan and receive the funds.

But it’s not! You will probably be shocked to know that most small businesses are eligible for an SBA 504 loan and that their applications move through the process smoothly.

It’s fantastic news for those who depend on the money to purchase the essential real estate and equipment they need to expand their business!

It's worth noting that the application doesn’t guarantee that your loan will be approved. You will need to meet all the criteria, and even then, there will be occasions where the loan application is rejected.

In these instances, be sure to ask why to find your loan was denied and what your next steps are. Due to COVID-19, more small businesses are applying for the 504 and other SBA loans, meaning that the competition is higher!

We always recommend enlisting the help of your lender or a financial advisor if you run into any issues when applying for a loan.

They will have a far better understanding of the application process and offer you tailored advice to your business.

There will always be a professional checking your application, but it can be worth seeking help when applying if you feel you need it.

Remember, these people are here to help you and your business succeed, so don’t feel embarrassed to ask for help!

We have a whole article dedicated to how hard it is to apply for an SBA 504 loan, be sure to check it out here!

Final Word

And just like that, we have reached the end of our SBA 504 loan journey together!

As you can see, to qualify for an SBA 504 loan, your business must operate in the United States for-profit and have a net worth of less than 15 million.

You must also have an average net income of less than 5 million dollars after income taxes for two years before your application is submitted.

Provided you meet the criteria, you can apply for an SBA 504 loan and are likely to have the loan approved!

Remember, the bank, other lenders, or a financial advisor can help you with the application and will provide advice tailored to you and your business specifically!

If you are unsure about the process or whether your business qualifies for the 504 loan, be sure to contact a professional for accurate advice and information.

Happy loan application!