Small businesses seek commercial real estate financing on favorable terms to accelerate their growth. However, rigid bank policies or steep equity requirements (as high as 50%) makes it difficult for businesses to secure a CRE loan. The SBA 504 program changes that. This powerful, government-backed tool allows owners to purchase or refinance their owner-occupied property with as little as 10% down payment*.
They create opportunities for both commercial real estate (CRE) borrowers and brokers to unlock deals that might not pass conventional credit standards. In this blog, we explore what an SBA 504 loan is and how it meets the financing needs of small business owners looking to acquire or refinance property.
What is an SBA 504 Loan?
Small Business Administration (SBA) offers 504 loans to small businesses as fixed-rate, long-term loans. The SBA 504 program supports small businesses to promote growth and encourage the creation of new jobs. The loans are provided by third party lenders and CDCs (certified development companies) and CDC debentures are guaranteed by the SBA. These loans usually require as low as 10% equity from the borrower.
The SBA 504 program works by distributing the loan among two parties: the lender, and the CDC, backed by SBA. The funding of the SBA-backed project follows a three-part structure.
- The borrower contributes 10% of the loan as equity,
- The lender funds 50% of the loan with a first lien
- The SBA lends 40% through a certified development company (CDC) with a second lien.
The SBA portion of the loan carries a fixed interest rate for 20 to 25 years. The rate stability enables borrowers to make predictable and long-term payments. At the same time, this shared model reduces lender risk and enables more accessible credit for borrowers.
The borrower cannot use an SBA 504 loan for investment in real estate (like rental-only properties) or meeting working capital needs. However, they can use the loan to purchase or refinance a wide range of business-use owner-occupied properties, including hotels, retail, self-storage, medical, and industrial spaces, etc.
What are the Eligibility Criteria for SBA 504 Loans?
The SBA loan program aims to promote business growth and job creation by offering financing to small businesses. Hence, not every property or business qualifies for SBA 504 loans. The borrower can secure the fixed-rate and long-term financing only by meeting the latest eligibility criteria set by the SBA.
U.S.-Based and For-Profit Company
The borrower must operate a for-profit company located in the United States or its territories. No non-profit business or passive investment entity qualifies for this government-backed lending program.
Permissible Property Types
The borrower can use SBA 504 loans only for the purchase or construction of property primarily used for their own operations. Certain property types, like gas stations and medical facilities, have to comply with industry-specific restrictions or additional eligibility checks.
Owner-Occupancy Requirement
The business must use at least 51% of the property for its own operations at the time of purchase. Owners can also secure SBA 504 loans for the improvement and modernization of the existing facilities.
Small Business Size Standards
The company has to meet the SBA’s definition of a small business. It must have a tangible net worth of less than $20 million and an average net income of less than $6.5 million after federal income taxes for the two years preceding the date of application.
Good Credit and Lawful Operations
SBA requires that the borrower must have a solid credit profile, a feasible business plan, qualified management expertise, a clean credit history, and the ability to repay the loan.
How SBA 504 Loans Benefit CRE Borrowers and Brokers?
SBA 504 loans, compared to conventional CRE loans, offer several strategic benefits to borrowers and brokers. They help borrowers access credit without sacrificing ownership and control of their commercial properties, while brokers find a strategic tool for turning complex opportunities into closed deals.
Benefits for Borrowers
Low Down Payment (as low as 10%): The low down payment helps borrowers keep valuable working capital in the business for future growth. They can drive it by using the money to hire skilled professionals, purchase equipment, or run marketing campaigns.
25-year Low Fixed Rates on SBA Debenture: The borrower will pay fixed interest rates for 25 years on the SBA debenture portion of the loan. Hence, they can plan cash flow with confidence without worrying about interest rate swings.
Equity Growth: The monthly payments enable borrowers to build ownership in a valuable property instead of paying rent. They create long-term value by controlling a major operating cost: rent. Additionally, they can increase equity through real estate appreciation and payments towards loan principal. Additionally, these loans help borrowers gain long-term control by mitigating lease uncertainty.
Expansion Opportunities: SBA 504 loans create opportunities for borrowers to expand strategically. A borrower can use the loan to open another location without increasing financial strain.
Benefits for Brokers
Competitive Edge: CRE brokers recommend SBA 504 loans as an alternative to conventional CRE loans. They gain a competitive advantage by making clients access credit in high-rate and tight-credit markets.
Close More Deals: Many clients, who do not meet the eligibility criteria for loans provided by banks, often meet the eligibility criteria for SBA 504 loans. Hence, brokers can convert many stalled deals into signed agreements by leveraging this government-backed lending program.
What are Common Challenges in SBA 504 Deals?
Despite delivering advantages to borrowers and brokers, SBA 504 loans have their own complexities. Success depends on early planning, accurate structuring, and seamless coordination among all parties involved.
1. Coordination Between Multiple Stakeholders
Each SBA 504 loan involves close collaboration between the lender, the Certified Development Company (CDC), and the SBA. Without clear communication and coordination, even small gaps can lead to big delays.
2. Selecting the Right CDC Partner
Not all CDCs operate the same way. Choosing the right one - based on experience, responsiveness, and familiarity with your market - can make or break timelines. The right CDC partner ensures the loan package moves efficiently through review and approval.
3. Structuring and Eligibility Complexity
Understanding SBA eligibility requirements and structuring the loan correctly at the outset is critical. Missteps in how ownership, use of proceeds, or business size are defined can result in last-minute eligibility issues that stall the deal.
4. Stringent Documentation and Compliance
SBA 504 loans demand a high level of documentation, from business financials to environmental reports and project details. Missing or incomplete paperwork can push back closing dates, so lenders and brokers must be meticulous about compliance.
5. Borrower Awareness and Expectations
Many borrowers are new to the SBA 504 process and unfamiliar with its timelines, approval flow, and documentation requirements. Without proper guidance, confusion can lead to unnecessary frustration and delays.
6. Risk of Stalled Deals
Deals can easily lose momentum without the right expertise in structuring, packaging, and coordinating with the CDC. Having an experienced partner helps keep the process on track and avoids costly rework or restarts.
How does AVANA help CRE Brokers and Borrowers?
AVANA supports borrowers and brokers with the acquisition or refinancing of CRE assets like hotels, retail, self-storage, medical, and industrial spaces, etc. We remove friction, protect relationships, and close transactions with speed, certainty, and transparency. Our end-to-end support helps both borrowers and brokers convert good opportunities into great results.
Proven Track Record: Our team has closed over $5 billion in SBA transactions successfully across key CRE sectors, including hospitality, retail, medical, and industrial. We have deep domain experience, which means fewer surprises and faster closings.
Full SBA Scope Support: Our in-house experts handle everything: structuring, packaging & processing, SBA eligibility review, CDC selection and coordination, credit underwriting and closing, so that you focus on only what matters most to you - closing the deal and move your project forward
Faster Underwriting, Smoother Closings: As SBA lending experts, we know how to anticipate and solve timing challenges before they become problems. Our expertise mitigates delays and surprises, while creating a cleaner path to funding.
A Better Borrower Experience: We boost borrower experiences through professional packaging, clear expectations, and guidance that turns a complex government-backed loan into a straightforward, confidence-inspiring process.
Transparent Noncompetitive Approach with Brokers: We keep brokers in the loop at every step. Brokers get a consistent partner who respects their client relationships and works to enhance their credibility.
Conclusion: More Access, Less Friction, Bigger Wins
SBA 504 loans, as one of the most powerful financing options, enable small businesses to access credit for the acquisition or refinancing of commercial real estate. Borrowers opt for SBA 504 loans as an alternative to commercial CRE loans to gain benefits like lower equity requirements and long-term fixed rates. Likewise, SBA 504 lending creates opportunities for brokers to convert many stalled transactions into closed deals. AVANA has been helping both borrowers and brokers leverage these benefits of SBA 504 loans by delivering certainty, speed, and value.
Want to accelerate SBA 504 loan deals by partnering with AVANA? Contact us.
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