The US Small Business Administration (SBA) 504 loans program is a financing vehicle that enables small businesses to purchase fixed assets with loans that are guaranteed by the government. Program loans are secured 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 that is federally funded to support economic development in a specific geographic area.
Businesses do not receive SBA loans. Instead, it guarantees the 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 since there is no risk of loss. The SBA controls the program by setting the eligibility requirements for its guarantee.
SBA 504 loans are available to small businesses to purchase fixed, or capital, assets. Fixed assets are tangible business property that has a useful life that goes beyond the current accounting cycle, such as real estate, manufacturing plants, and major equipment. The purpose of the program is to enable small businesses to modernize and expand, spurring the country’s economy.
Only for-profit small businesses with a net income of less than $2.5 million US Dollars (USD) and a net worth of less than $7.5 million USD are eligible for SBA 504 loans. The program also evaluates the business owners and makes them ineligible for SBA 504 loans if they have a tangible personal net worth of over $15 million USD. This is to prevent wealthy owners from using government-backed funds designed for businesses that cannot get a loan without a guarantor in lieu of investing their own money into their business.
The business must be able to put up at least 10 percent of the acquisition cost, or more if the business is less than two years old or if the asset is classified for a special purpose. A conventional lender lends up to 50 percent of the acquisition price. CDCs lend 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 business create jobs, the business can borrow up to $1.5 million USD. If the business is a small manufacturer, it can borrow up to $4 million USD. The eligibility thresholds, the amounts that can be borrowed, and the funding goals and objectives will change every time the legislation that funds the program goes up for renewal.