When Taoti was outgrowing our old office space, we found new space right across the street. But it was a big move for us—one of those needles that was going to be hard to thread, financially speaking. I don’t think we could have pulled it off with out the SBA 504 program, and in particular, REDCO’s expert guidance in navigating the ins and outs of the requirements and process. They were instrumental in bringing together all the parties, pushing through all the pitfalls, and getting our deal over the finish line. Couldn’t have done it with out them!
SBA 504 Loan Overview
The SBA 504 Loan Program provides below-market, fixed-rate, long-term financing for purchasing owner-occupied real estate and equipment. This loan program was created to encourage the growth of small businesses by expanding access to capital while also allowing businesses to preserve cash critical to their operating needs. It remains one of the best financing options available for small business owners today.
504 Loan Benefits
Low Down Payments
Typically, 10%. For start-up businesses with less than two years of operations, or for properties designated as special-use properties, a 15% down payment is required (20% down if both start-up and special use).
Long-term Amortization
Loans are fully amortized over 20 or 25 years for real estate and 10 years for equipment and machinery. There is no balloon payment.
Competitive, Fixed Rates
Competitive and below-market interest rates that are fixed for the entire term of the loan.
Government Guarantee
504 loans are guaranteed by the government and typically only require the property or equipment being purchased as collateral.
504 Loan Assumption
If you sell your property, the buyer can assume the 504 Loan with the low, locked-in interest rate.
Business Qualification
For-Profit, Privately Held Business
Available to most for-profit businesses, such as corporations, limited liability companies, partnership, or proprietorship, except those engaged in lending, investment, or gambling.
Small Business Size
Net worth must not exceed $20 million and average net income after taxes for the past two years must not exceed $6.5 million.
Owner Occupancy
In the case of the acquisition of an existing building, the operating company must occupy at least 51% of the usable space. In the case of new construction, the operating company must occupy at least 60% of the space immediately, increasing to 80% within three years; the remaining 20% can be leased out indefinitely.
Loan Structure
The 504 Loan Program provides up to 90% financing, covering land and building purchases, construction, renovations and most equipment. Most closing and soft costs are also eligible, including title insurance, deed recordation, appraisal and environmental assessments.
Refinancing existing debt is also eligible, with the ability to cover property improvements as well as certain eligible business expenses.
Purchase of land and buildings
Long-term amortization construction or renovations
Most furniture, fixtures and equipment
Refinancing existing commercial mortgage debt with additional funding available to make property improvements and access additional funds to cover certain other eligible business expenses.
Most closing costs and certain other fees, like deed recordation, title insurance, bridge loan fees and interest, appraisal, and environmental assessments
How It Works
Business Owner
Contributes down payment (10% in most cases)
REDCO/SBA 504 Program
Provides up to 40% financing of the project costs up to a maximum of $5,000,000 and takes a second lien on the project assets. In the case of manufacturers or projects that qualify under the 504 Green Energy effort, a maximum of $5,500,000 is allowed.
Lending Partner
Provides 50% financing at market rates and terms and takes a first lien on the project assets. The Lending Partner is commonly a bank or credit union, and REDCO can assist with that selection, if needed.
Veteran-Owned Businesses
REDCO also offers reduced fees for veteran-owned businesses through our participation in the VetLoan Advantage Program. REDCO was among the first certified development companies in the nation to participate in the SBA’s VetLoan Advantage Program.
Frequently Asked Questions
What happens if I sell my property?
If you sell your property, the buyer can assume the 504 Loan with the low, locked-in interest rate. The buyer is subject to full credit underwriting and must meet eligibility requirements for the program.
Are there prepayment penalties if I pay my loan off early?
Yes, there is a declining penalty for the first 10 years based on the loan amount and funding rate. We are happy to provide you with the sliding scale.
What’s the difference between a 504 Loan and an SBA 7(a) Loan?
Both 504 loans and 7(a) loans are guaranteed by the SBA. However, 504 loans require a lower down payment and offer fixed rates with repayment terms over 25 years (real estate) or 10 years (machinery/equipment). In contrast, 7(a) loans often have significantly higher and/or adjustable rates, and usually cost more over the loan’s life. REDCO can provide a cost comparison specific to your project if desired. Further, whereas a 504 Loan is typically secured by the assets being financed, SBA 7a Loans may require pledging additional assets, including personal assets.
How long is the process?
REDCO works closely with you throughout the entire process, completing most of the forms for your review. We coordinate with your bank so that both bank and REDCO approvals occur at about the same time. After this, REDCO submits your application to the SBA, which typically reviews the package within 5-7 days.
What is the maximum loan amount?
While there is no maximum project size, the 504 loan is limited to the lesser of $5 million or 40% of the total project costs. The first trust bank can lend more than 50% if necessary. The 504 loan limit increases to $5.5 million if the project is for a small manufacturing business or meets certain energy-efficient project requirements.
What is the minimum project size?
$150,000.
Where can my down payment come from?
Your down payment for an SBA 504 loan can come from various sources, including:
- Business or Personal Cash: Funds available from your business or personal savings.
- Gifted Money: Financial gifts from family or friends.
- Home Equity: Funds derived from the equity in your home.
Additionally, a portion of the down payment can be borrowed, provided it meets the repayment terms set by the SBA and REDCO. We are happy to discuss all these options with you to ensure you find the best solution for your down payment needs.
What would impact the down payment?
Most businesses qualify with just 10% down. The down payment for an SBA 504 loan can be influenced by several factors:
- Start-Up Businesses: If your business has less than a 2-year operating history or is undergoing a management change, it is considered a start-up business. Start-up businesses are subject to a 15% down payment.
- Special Use Properties: If the property being financed is classified as “Special Use” (e.g., hotel, car wash, gas station), a 15% down payment is required.
- Start-Up with Special Use Property: If your business is both a start-up and the property is considered a special use asset, the required down payment increases to 20%.
These adjustments ensure that the loan terms reflect the increased risk associated with new ventures and specialized properties.
What is REDCO’s role in the 504 Loan program?
We are your SBA 504 Program experts. REDCO simplifies the loan process for borrowers by handling all the details, allowing you to focus on growing your business. We make sure you have all the information you need to make the best decision for your business. We underwrite and package the loan request, submit it to the SBA on your behalf for loan approval, ensure a smooth closing process, and service the loan after it is funded.