Who this is for: Small business owners looking to purchase commercial real estate or major fixed equipment and who want to understand how the SBA 504 program works and whether it is right for their situation.

If you are buying a building for your business or investing in major equipment, the SBA 504 loan is one of the best financing tools available. It offers a low fixed rate on the CDC portion, a below-market down payment, and long repayment terms. But it is narrowly focused: it only works for fixed assets, and the three-party structure (bank, CDC, and borrower) adds complexity that you need to understand before you start the process.

How the SBA 504 Loan Structure Works

The 504 program is unique because it combines two loans, not one:

1. Bank loan (50%): A conventional loan from your bank covering 50% of the project cost. The bank sets its own terms on this portion, which are typically variable rate.
2. CDC loan (40%): A loan from a Certified Development Company (a nonprofit licensed by the SBA) covering up to 40% of the project cost. This portion carries a fixed rate tied to the US 10-year Treasury bond rate, often several points below the bank’s rate.
3. Borrower equity (10%): You contribute at least 10% of the project cost as a down payment. For startup businesses (less than 2 years operating) or single-purpose buildings, the requirement increases to 15-20%.

For example, on a $1,000,000 building purchase: the bank loans $500,000 at a variable rate; the CDC loans $400,000 at a fixed rate; you put in $100,000 (10% down). This structure allows you to acquire a $1M asset with only $100,000 in cash, a down payment far lower than most conventional commercial loans require (typically 20-30%).

Eligible Uses for the 504 Program

The 504 loan is strictly limited to fixed assets that promote business growth and job creation:

• Owner-occupied commercial real estate (you must occupy at least 51% of the building)
• Construction or renovation of commercial buildings
• Long-term machinery and equipment with a useful life of 10+ years
• Site improvements (parking lots, utilities, landscaping related to the building)

The 504 cannot be used for:

• Working capital or inventory
• Consolidating or refinancing existing debt (with limited exceptions)
• Investment real estate where you are not an owner-occupant
• Goodwill or intangibles in a business acquisition

This narrow scope is where the 7(a) wins on flexibility. If you need funds for both a building purchase and working capital, you may need a 7(a) or a combination of both programs. See our complete guide to the SBA 7(a) loan program for a comparison of the two.

Loan Amounts and Rates

The CDC portion of a 504 loan can go up to:

• $5.5 million for standard projects
• $5.5 million for energy-efficient projects that reduce energy consumption by 10%+
• $5.5 million for small manufacturers

Because the bank covers 50% and the CDC covers 40%, the maximum total project size is typically $13.75 million ($5.5M / 40%). In practice, most 504 transactions are for projects in the $500K-$5M range.

The CDC interest rate is set monthly by the SBA based on the current 10-year Treasury rate plus a spread for the debenture, SBA fees, and CDC servicing. Rates are typically 0.5-1.5% below comparable conventional commercial real estate loans, which is significant over a 20-25 year term.

SBA 7(a) vs SBA 504: Head-to-Head Comparison

How to Apply for a 504 Loan

1. Find a CDC in your area: Certified Development Companies are nonprofit organizations authorized by the SBA to administer the 504 program. Use the SBA’s CDC locator at sba.gov/funding-programs/loans/504-loans to find a local CDC.
2. Work with your bank simultaneously: The bank and CDC work in parallel. You will need a bank willing to provide the 50% conventional portion. Many SBA-approved lenders regularly partner with CDCs.
3. Identify your project: Get the property under contract or identify the equipment. The CDC needs to know the specific asset to structure the loan.
4. Submit documentation: Similar to a 7(a) application: 3 years of business tax returns, personal tax returns, financial statements, business plan, purchase contract, and environmental reports (for real estate).
5. SBA approval and debenture sale: After both the bank and CDC approve the loan, the CDC packages it into a debenture that is sold to investors. This is what funds the CDC’s portion and what locks in the fixed rate.
6. Closing: The bank closes its portion first, then the CDC debenture funds, typically 45-60 days later. You will attend two separate closings.

Who Qualifies for the 504 Program?

Basic eligibility requirements include:

• For-profit business operating in the United States
• Net worth under $20 million and average net income under $6.5 million after taxes for the past 2 years
• Owner-occupancy: you must use at least 51% of the purchased building for your business (60% for new construction)
• Job creation or retention: the SBA expects 1 job per $65,000 of CDC financing (some exceptions apply)
• Business in good standing with existing creditors

For more on financing commercial real estate and the decision between buying and leasing, see our guide on buying vs leasing commercial real estate.

Key Takeaways

• The 504 is the best SBA option for buying owner-occupied commercial real estate or major equipment
• The three-party structure (50% bank + 40% CDC + 10% down) requires only a 10% down payment
• The CDC portion carries a fixed below-market rate, providing long-term payment certainty
• Working capital, inventory, and most business acquisition costs are not eligible uses
• Find a CDC through the SBA’s website and work with both lenders simultaneously
• The 7(a) beats the 504 on flexibility; the 504 wins on rate and structure for pure real estate deals

Frequently Asked Questions

Can I use the 504 to buy a mixed-use building?

Yes, if your business occupies at least 51% of the building. The remaining portion can be leased to tenants. This can be an attractive strategy: your tenants’ rent offsets your mortgage payment while you build equity in the property.

How long does a 504 loan take to close?

Expect 60-120 days from application to funding. The debenture packaging and sale process adds time compared to a standard bank loan. If you have a contract with a closing deadline, start the 504 process as early as possible and discuss the timeline with your CDC and bank upfront.

Can I refinance an existing mortgage with the 504 program?

The SBA has periodically allowed debt refinancing through the 504 program under specific conditions, primarily for owner-occupied commercial real estate. Check the current program guidelines with a CDC, as eligibility requirements for refinancing change.

What are the fees on a 504 loan?

The CDC charges an origination fee (typically 1.5% of the CDC portion) plus an ongoing servicing fee (0.625% annually). SBA charges a guarantee fee. These fees are often financed into the loan. Get a full cost breakdown from your CDC before committing.

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