The SBA 504 loan program allows small businesses to purchase fixed assets with government-guaranteed loans obtained through a combination of financing from a conventional lender and a Certified Development Corporation. The program is only available for small for-profit businesses with a net income of less than $2.5 million USD and a net worth of less than $7.5 million dollars. The business must be able to pay at least 10 percent of the acquisition cost, and the maximum amount that can be borrowed depends on the goals set by the government for the program.
The US Small Business Administration (SBA) 504 loan program is a financing vehicle that allows small businesses to purchase fixed assets with government-guaranteed loans. Program loans are obtained through a combination of financing from a conventional lender, such as a bank, and a Certified Development Corporation (CDC). A CDC is a community-based, nonprofit organization that receives federal funds to support economic development in a specific geographic area.
Businesses do not receive SBA loans. Instead, it guarantees loans made by a private entity, such as a bank, in case of default. If the small business defaults on the loan, the SBA reimburses the lender, so the lender has no reason not to make the loan as there is no risk of loss. The SBA controls the program by setting the eligibility requirements for your guarantee.
SBA 504 loans are available for small businesses to purchase capital or fixed assets. Fixed assets are tangible business properties that have a useful life beyond the current accounting cycle, such as real estate, manufacturing plants, and major equipment. The objective of the program is to allow small businesses to modernize and expand, stimulating the country’s economy.
Only small for-profit businesses with a net income of less than $2.5 million United States Dollars (USD) and a net worth of less than $7.5 million dollars are eligible for SBA 504 loans. The program also evaluates the owners business and makes them ineligible for SBA 504 loans if they have a tangible personal net worth of more than $15 million. This is to prevent wealthy homeowners from using government-backed funds designed for businesses that can’t get a loan without a guarantor instead of investing their own money in their businesses.
The business must be able to pay at least 10 percent of the acquisition cost, or more if the business is less than two years old or the asset is classified for a special purpose. A conventional lender lends up to 50 percent of the purchase price. The CDC lends up to forty percent of the cost. Both the conventional loan and the CDC loan are guaranteed by the SBA.
SBA 504 loans have a maximum amount that can be borrowed that is based on the goals set by the government for the program. For example, if the asset helps the company create jobs, the company can borrow up to $1.5 million. If the business is a small manufacturer, you can borrow up to $4 million dollars. Eligibility thresholds, amounts that can be borrowed, and funding goals and objectives will change each time the legislation funding the program is renewed.
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