About SBA 504 Loans

The 504 program is currently the fastest growing government guaranteed loan program.  A 504 loan is made up of a conventional first loan and a government guaranteed debenture, which has a subordinate collateral position to the conventional loan.  These loans may be used to acquire or construct fixed assets, including commercial real estate, and machinery and equipment.  In order to be eligible for an SBA 504 loan, the business must be for-profit and, in the case of real estate, the property must be at least 51% occupied by the borrower (60% for new construction).

In a typical transaction, the lender makes a senior loan with a first lien position on all collateral for approximately 50% of the total project cost (i.e., acquisition, construction, capitalized interest, fees, etc.).  The 504 debenture is made for 30% to 40% of the total project cost and the remaining 10% to 20% is equity from the borrower, or additional subordinate debt provided by the seller.  The maturity period for the senior loan must be at least 50% of that of the debenture.  The remainder of the terms and conditions are at the discretion of the lender. 

The Debenture – A Certified Development Corporation (“CDC”) is a non-profit corporation chartered through the SBA for the specific purpose of acting as a conduit for the SBA to provide direct subordinate financing for fixed asset acquisitions. 504 debentures carry the full faith and credit of the U.S. Government for the total amount of the debenture.  Debentures are auctioned off on a monthly basis.  The debentures themselves have maturities of either 10 or 20 years, depending on the use of the proceeds, and carry a fixed rate of interest (typically below market rates) for the term of the loan.

The advantage of the 504 program is:

• The borrower is able to secure up to 90% financing for fixed asset purchases (100% with seller carry-back) at terms that are more favorable than 7(a) loans and can be more favorable than conventional loans.