Like many other kinds of loans, SBA 504 loans have a down payment requirement. Whether equipment, construction, factory-grade machinery, heavy equipment, or owner-occupied real estate updates, SBA 504 loans provide growing businesses with long-term, fixed-rate financing of up to $5 million. If you’re considering an SBA 504 loan for your next big construction project, it’s important to understand how much you need to contribute. Luckily, SBA 504 loans only require a 10% down payment; let’s break down the details.
What is an SBA 504 Loan Down Payment?
An SBA loan down payment is the cash equity the SBA requires the borrower to inject into the total project. What drives SBA 504 loans from others is the demand for a much lower down payment—10% (for non-special-use properties), whereas others can reach 30% or more. This gives borrowers the financial space to secure more assets while securing their business success.
SBA 504 Loan Down Payment Benefits
In our other blog, we cover the many pros this low down payment can provide for business owners looking to expand their businesses. If eligibility is met, borrowers can expect to reap the following rewards:
- Conserved working capital.
- Maximized cash flow.
- Lower real estate down payments.
- Minimized credit risk.
- Accessibility for other loans.
SBA 504 Construction Loan Down Payment: How it Works
One of the purposes of an SBA 504 loan is to help entrepreneurs purchase, renovate, and improve construction projects. This allows business owners to expand to new locations, move to larger, more accommodating buildings, and update old facilities. When it comes to the down payment, it relies on the price and size of your construction plan.
Though SBA 504 loans require a down payment, it’s only at a minimum of 10 percent. However, if your property classifies as a religious building, private school, hospital, theater, amusement park, museum, campground, or other special-use business, you are subject to a 15% down payment requirement. When the business is special-use and a start-up, 20% is required. Also, your projected down payment depends on the overall strength of your small business loan application—where sound finances and business plans come into play.
For example, small start-up businesses that are two years old or younger require a 15% down payment. Loans cannot be distributed to companies participating in passive, nonprofit, or speculative practices, as referenced on the official SBA website.
SBA 504 Loans For Construction Assets
An SBA 504 loan can be used for various assets that promote business growth and job creation. These include the purchase or construction of:
- Current buildings or land
- New facilities
- Long-term heavy machinery and equipment
Or the improvement or modernization of:
- Land, streets, utilities, parking lots, and landscaping
- Existing facilities
A 504 loan cannot be directly used for:
- Working capital or inventory
- Consolidating, repaying, or refinancing debt
- Speculation or investment in rental real estate
Conclusion: Budget Your Finances for SBA 504 Construction Loan Down Payments
If you want to transform and grow your business, you’ll need to manage your cash flow too. It’s a given that any loan you apply for demands some condition—whether it be a down payment, high credit score, tangible net worth, and more. With SBA 504 loans, you can expect to put down a reasonable down payment to secure your construction project. Therefore, if you’re not prepared to make an SBA 504 down payment, you’re most likely not financially ready to handle an SBA 504 loan. Regardless, business owners are suggested to budget their finances accordingly to effectively fund their share of the SBA 504 loan (the remaining funds allocated 50% by a third-party lender and 40% by the CDC), as well as save money for other fixed assets in the future.
Optimize Your SBA 504 Construction Loan With 504 Capital
504 Capital helps successful businesses that meet SBA qualifications obtain funding through SBA 504 loans with concentrated financial expertise. We’ll walk you through all of the stages of the loan process and bridge the gap between the SBA and your business success. With an SBA construction loan in Virginia, North Carolina, Maryland, and Washington, D.C., you can gain just the right amount of funding you need to secure your business’s future.
Ready to start your SBA 504 construction loan application? Contact us to discover your financing options.