What can the SBA 504 Program do for you?

Business owners may be surprised to learn that one of the best loan programs available to them when acquiring, renovating or constructing their facilities is a government program. The United States Small Business Administration (“SBA”), created the 504 Program to encourage economic development, create and preserve job opportunities and to stimulate growth, expansion and modernization of small businesses. The 504 Program is most commonly used for the acquisition and/or renovation of an existing building, or construction of a new building. The 504 Program can also be used to acquire personal property primarily in the form of large pieces of machinery and/or equipment.

Is your business small enough to qualify for the 504 Program? A business is considered “small” under the 504 Program, if it has a tangible net worth of less than $15,000,000.00 and a two-year average net income after federal income tax of $5,000,000.00 or less. The overwhelming majority of businesses in the United States are, therefore, eligible to participate in the 504 Loan Program. A business must also be organized for profit and located within the United States. Passive businesses such as investment real estate or non-profit businesses are not eligible to participate in the 504 Program.

Since this is a “small” business loan, will you be able to borrow enough to complete your project? The SBA 504 loans can range from a minimum of $50,000.00 to a maximum amount of $5,000,000.00. Since the 504 portion of the loan is generally only 40% of the total project cost, a 504 Loan can then be used for a fairly wide-range of eligible business projects.

The economic development component of the Program is met through job creation, job retention or public policy goals. The stated goal for the 504 Program is the creation or retention of one full time job for every $65,000 of 504 financing involved. For manufacturing companies, that number increases to one job created or retained for each $100,000 of 504 financing.

The structure of the 504 Loan Program makes it highly attractive to both businesses and to their private lenders. The typical SBA 504 Loan provides up to 90% project financing structured as follows:

  • 50% of the project is financed by a private lender (most local banks participate in the 504 Program),
  • 40% is financed by the SBA, and
  • 10% equity is contributed by the borrower.

From a collateral standpoint, the private lenders enjoy a 50% loan to value, first mortgage/lien position, while the SBA takes a second position. The business is ordinarily required to invest only 10% of the project cost (versus 20% or more in most conventional financing deals). Finally, 504 interest rates are fixed for 20 years. By way of example, the 20 year fixed interest rate for the 504 Loans funded in March, 2014, was 5.29%.

Below is an illustration of a typical project involving an SBA 504 Loan.

Acquisition of Land $250,000.00
Construction of New Facility $750,000.00
Total Project Cost $1,000,000.00
Funding Structure
Bank Permanent Loan $500,000.00
Bank Interim Loan* $400,000.00
Borrower Equity $100,000.00

*Following completion of construction, the 504 Loan will pay off and replace the Bank Interim Loan.

The 504 Program is administered on a local level by certified development companies. Hamilton County Development Co., Inc., has been certified by the SBA to administer the Program for the United States Small Administration since the mid-1980s. HCDC has participated in approximately 1,000 SBA 504 Loans since the program’s inception, and is annually one of the top 504 lenders in the State of Ohio.While businesses are often advised to steer clear of government programs, I encourage any business looking to expand their facilities, acquire a new facility or purchase a large piece of equipment or machinery to investigate the SBA 504 Program. It truly is a program where the government “got one right.”

This entry was posted in News.
  • About the Author


    Thomas M. Woebkenberg

    Tom Woebkenberg practices in the firm’s Real Estate Practice Area. His practice consists primarily of commercial real estate transactions. He represents lenders of all sizes throughout Ohio and Northern Kentucky.

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