SBA 504 Loan

An SBA 504 loan finances major fixed assets, such as buying a building, building a new facility or buying long-lived machinery. It gives small businesses long-term, fixed-rate financing with a small down payment, and it aims to support job creation and local growth.

Unlike the SBA 7(a) loan, a 504 project uses two loans plus the borrower's own cash. A Certified Development Company (CDC) originates the 504 portion together with a private lender. CDCs are nonprofits certified and regulated by the Small Business Administration (SBA). A typical structure looks like this:

• Third-party lender: about 50% of the project cost, secured by a first lien.
• CDC: up to 40%, funded by a debenture that SBA guarantees in full, secured by a second lien.
• Borrower: at least 10%, and more for startups or special-purpose buildings.

A simple example: a manufacturer buys a $2 million building. The bank lends $1 million, the CDC lends $800,000 and the owner puts in $200,000. The owner then makes two monthly payments, one to the bank and one on the CDC loan.

As of 2026, the SBA-backed CDC portion is generally capped at $5 million, or $5.5 million for small manufacturers and certain energy projects. Since July 2026, a borrower can also hold up to $5 million in 7(a) loans on top of that. Terms are 10, 20 or 25 years. The CDC loan's fixed rate is tied to 10-year US Treasury rates. A 504 loan cannot be used for working capital, inventory or speculative real estate. Program rules are in SBA's SOP 50 10 (version 8.1 from October 1, 2026).

Why it matters for lenders

For the bank, the 504 structure means a large loan with a low loan-to-value (LTV) ratio and a first lien, while the CDC takes the riskier second position. For the CDC, the job is coordination: eligibility, job creation goals, debenture timing and closing documents across several parties.

The bank often makes an interim loan that covers the CDC's share until the debenture is sold. That gap between closing and debenture funding needs close tracking, because the bank carries extra exposure until it ends.

How it works in practice

A CDC loan officer gets a referral from a bank for a dental practice buying its office. She checks eligibility, the job creation goal and the owner's equity, then prepares the SBA application. The bank underwrites its first-lien loan. After approval, the bank funds the interim loan, the purchase closes, and the CDC prepares the debenture closing.

Each party tracks its own conditions, title work, insurance and appraisals. When those lists live in separate inboxes, one missing document can delay the debenture sale by a month and leave the bank holding the interim loan longer than planned.