Top 5 Ways to Use Your SBA 504 Loan
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What is a 504 SBA Loan
The Small Business Administration (SBA)’s 504 Loan Program was created specifically to help small businesses by granting access to long-term, fixed-rate financing. What does this mean? Whether you are either brand new or growing, an SBA 504 loan makes it possible for you to expand, modernize, and/or purchase real estate.
Typical borrowers come from all branches of the medical/professional, retail/service, industrial, and special-use industries. This can be anything from doctor’s offices to recycling facilities to mini-storage facilities.
Why Are 504 Loans So Popular?
- Low-interest fixed interest rates.
- As low as a 10% down payment.
- Funds the total cost of the project, including furniture, closing costs, and fees.
- Fixed interest rate allows for predictable payment amounts.
What Can an SBA 504 Loan Be Used For?
Fixed Assets
- Modernizing existing facilities
- Building new facilities
- Machinery and equipment
- Debt refinance with expansion
- Professional fees, such as appraisal, title insurances, and document stamps
Working Capital
- Seasonal financing
- Export loans
- Revolving credit
- Refinancing business debt
Before getting into some of the best ways you can use the SBA 504 loan, make sure you’re clear about what’s not allowed. This includes:
- Start-up costs
- Working capital
- Purchasing inventory
- Consolidating debt
- Repaying debt
- Refinancing*
*The SBA offers a separate loan subprogram (see below) to help small business owners reduce their financial obligations.
Also Read:- What Should You Know About Each SBA Loan
SBA 504 Loan for Startups: Is It Possible?
SBA 504 loans can be used by startups, but only for financing fixed assets like real estate, construction, or equipment, not for general startup costs or working capital. While the program is not designed for early-stage operational funding, new businesses can still qualify if they are purchasing or developing owner-occupied commercial property. In these cases, borrowers are typically required to contribute a higher equity injection, usually around 15% instead of the standard 10%. This makes the SBA 504 loan a viable option for entrepreneurs who are ready to invest in long-term assets from day one.
Tip: If you’re launching a new business, consider pairing an SBA 504 loan with an SBA 7(a) loan to cover working capital needs.
Top 5 Ways to Use Your SBA 504 Loan
- Open New Locations – One benefit of the 504 is a purchase-renovation feature. This lets borrowers finance both the purchase and improvements to an existing building or property in one transaction. For example, as you expand your business, you can buy a building that doesn’t quite work as-is and remodel it with the same funds.
- Go Green – If you’re updating an existing facility, why not make it more energy efficient? As an incentive, SBA’s Grow (504) Loan Program will provide environmentally friendly projects with up to an additional $5 million in second mortgage funds. This financing is not affected by any pre-existing SBA loans. So, by spending less on your utility bill, you can get more capital for building projects!
- Purchase Equipment – If dismantling, transporting, and installing equipment is a part of your comprehensive 504 projects, those costs are all covered. Please note that If the project is only to be used for machinery and equipment, both must have a useful life of at least 10 years. Some examples include X-ray machines, dry-cleaning equipment, commercial printers, and equipment that generates renewable energy.
- Fulfill a Dream – While SBA 504 loans can’t provide “start-up” funds for new businesses, they can, however, offer financing for a start-up company’s fixed asset purchase (or construction or renovation of that purchase). In those cases, a borrower must provide an additional 5% equity, bringing total equity injection to 15% vs 10%.
- Refinance Existing Debt – A 504 refinance loan is always combined with a bank loan to refinance any debt you’ve previously incurred for commercial real estate and fixed-asset projects. Under this program, available through 504 Capital Corporation, an SBA CDC loan provider serving Maryland, Virginia, and North Carolina, you can apply for below-market, fixed interest rate refinancing. One benefit of the loan is that you’re able to cash out up to 20% of the value of the property to use as working capital.
What SBA 504 Loans Cannot Be Used For
SBA 504 loans are restricted to long-term fixed assets and cannot be used for short-term operational expenses or general business funding. The program is specifically designed to support economic development through real estate and equipment investments, which means certain common business expenses are not eligible. Understanding these limitations helps business owners avoid application issues and choose the right financing structure.
Here are the main things SBA 504 loans cannot be used for:
- Working capital or day-to-day operational expenses
- Purchasing inventory or supplies
- Paying off or consolidating unsecured debt
- Startup costs not tied to fixed assets
- Speculative real estate investments
Tip: If you need flexibility for expenses like payroll or inventory, look into SBA 7(a) loans instead, which are designed for broader use cases.
Why Choose 504 Capital Corporation?
At 504 Capital Corporation, we know that whether a business succeeds or fails can depend on access to affordable loans. As a top SBA 504 lender in Maryland, Virginia, and North Carolina, our team of experienced lending officers is committed to putting our skills and knowledge to work for you.
Have Questions? Don’t wait; Call Our SBA 504 loan Experts Now!