Beginners Guide to SBA 504

If you have a small business which needs a new building or machinery, you may be eligible for a SBA 504 loan. Small businesses may be able to purchase land, buildings, equipment, or other assets with a 504 loan, granted by the U.S. Small Business Administration.

 

Purpose

 

A 504 loan, or Certified Development Company loan, is granted by the U.S. Small Business Administration to small companies to finance business property or assets. Some assets that can be purchased with a 504 loan are buildings, land, or machinery. Renovations and property improvements may also be eligible.

 

Eligibility

 

Not everyone may be eligible for a SBA 504 loan. The Small Business Administration has guidelines for the size and income of a small business. The company must not have more than $5 million in average net worth for two years or a total net worth of $15 million. The loan must exceed the total liquid assets of the principals and the borrower must use the loan within one year to purchase at least 51% of the property intended.

 

Terms

 

The SBA has outlined some additional terms for the SBA 504 loan. The loan should be used for the purchase of assets or renovations and not for working capital, debt repayment, or product inventory. The property purchased should be assets the company uses after purchase. For example, real estate investments and speculation would not be eligible. Maximum loan amounts and length of repayment can vary, but most loans require a 10-year repayment for equipment and a 20-year repayment term for land or buildings.

 

Benefits

 

Often these loans can negotiate a rate for the assets lower than market rate, which can be a benefit to small businesses for which large asset purchases may be difficult to obtain. For a small business that meets the eligibility requirements, a 504 loan also has competitive terms for repayment of the loan.

 

Considerations

 

SBA loans can have a significant processing time due to their high demand and the investigation process to determine small business eligibility. Since the negotiation process may help reduce the market price of the assets, this may make the wait time more worthwhile. The 504 loan also requires a comprehensive and time-consuming application which might require stringent records from the applicant.

 

You may want to research if your company is eligible for a 504 loan. While a SBA 504 loan may not be right for every business, it can be a way for small businesses to reach their operating goals more quickly than through a traditional loan or net profits.

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