SBA 504 Loan Basics

Your business must be operated for profit.

Under SBA 504 guidelines, a business is considered to be a small business if it meets both of the following size tests:

• Net Worth of the business is less than $15,000,000
• Profits After Tax are less than $5,000,000 (averaged over the last two years)

If your company does not meet these 504 size standards, the company can still be considered a small business if it meets the 7(a) size standards.

SBA 504 loan proceeds can be used for the following purchases:

• Acquisition of land
• Land improvements
• Acquisition of an existing building
• Leasehold Improvements (improvements must have a useful life of at least 10 years)
• Acquisition of Machinery and Equipment

Loan proceeds can also go towards the payment of professional fees directly tied to the loan request (i.e. architectural fees incurred for drawings of a proposed building), and some other administrative costs. However, listed below are ineligible project costs.

• Incorporation and organizational expenses
• Management or counseling fees
• Finders fees/broker fees
• Origination and commitment fees
• Working Capital
• Intangible Assets (Goodwill, Covenant Not to Compete)
• Furniture and equipment (with life less than 10 years)
• Inventory purchases
• Closing costs
• Franchise fees

If your business falls within one of the following categories, it is ineligible for an SBA loan.

• Non-profit organization
• Financial business primarily engaged in the business of lending
• Passive business owned by developers and landlords
• Academic school with a religious affiliation
• Speculative firm
• Life insurance company
• Business located in a foreign country
• Gambling facility
• Pyramid sales organization
• Recreational facility not open to the general public
• Business engaged in any illegal activity
• Private club or business which limits the number of memberships for reasons other than capacity
• Government-owned entity
• Consumer and marketing cooperative
• Loan packager earning more than one-third of their gross annual revenue from packaging SBA loans
• Business with an associate who is incarcerated, on probation, on parole, or has been indicted for a felony or crime of moral corruption
• Business which presents live performances of an offensive sexual nature; or sells products or services of a sexual nature
• Unless waived by SBA for good cause, business that has previously defaulted on a Federal loan
• Business primarily engaged in political or lobbying activities

An SBA 504 loan has a term of either 10 years or 20 years. The proceeds determine the length of the loan.

• Machinery and equipment purchases or leasehold improvements: 10 years.
• Land purchase, construction, and/or purchasing an existing building: 20 years.

Typically, the SBA 504 loan requires only a 10% injection into the project. Under the 504 loan product, two loans are issued. One is the loan from the lender, and the SBA issues a separate loan. The structure for the 504 product, as a percentage of total project costs, is typically as follows:

• 50% Lender’s loan
• 40% 6 Bridges Capital Corporation/SBA 504 Debenture note
• 10% Capital injection

(Note: ineligible project costs are considered separate from total project costs. Therefore, your total injection could be more than 10%, as outside costs would have to be covered by you.)

The above structure changes based on the scope of the project. For example, the SBA will require a 15% injection from the borrower (reducing their loan to 35% of total project costs) on single-purpose buildings. A start-up business also requires a 5% increase in the borrower’s injection. Therefore, a startup business that will use a single-purpose building such as a gasoline station would require a 20% capital injection.