Your business must be operated for profit.
Under SBA 504 guidelines, a business is considered to be a small business if it meets both of the following size tests:
- Net Worth of the business is less than $15,000,000
- Profits After Tax are less than $5,000,000 (averaged over the last two years)
If your company does not meet these 504 size standards, the company can still be considered a small business if it meets the 7(a) size standards.
Use of Proceeds
SBA 504 loan proceeds can be used for the following purchases:
- Acquisition of land
- Land improvements
- Acquisition of an existing building
- Leasehold Improvements (improvements must have a useful life of at least 10 years)
- Acquisition of Machinery and Equipment
Loan proceeds can also go towards the payment of professional fees directly tied to the loan request (i.e. architectural fees incurred for drawings of a proposed building), and some other administrative costs. However, listed below are ineligible project costs.
- Incorporation and organizational expenses
- Management or counseling fees
- Finders fees/broker fees
- Origination and commitment fees
- Working Capital
- Intangible Assets (Goodwill, Covenant Not to Compete)
- Furniture and equipment (with life less than 10 years)
- Inventory purchases
- Closing costs
- Franchise fees
If your business falls within one of the following categories, it is ineligible for an SBA loan.
- Non-profit organization
- Financial business primarily engaged in the business of lending
- Passive business owned by developers and landlords
- Academic school with a religious affiliation
- Speculative firm
- Life insurance company
- Business located in a foreign country
- Gambling facility
- Pyramid sales organization
- Recreational facility not open to the general public
- Business engaged in any illegal activity
- Private club or business which limits the number of memberships for reasons other than capacity
- Government-owned entity
- Consumer and marketing cooperative
- Loan packager earning more than one-third of their gross annual revenue from packaging SBA loans
- Business with an associate who is incarcerated, on probation, on parole, or has been indicted for a felony or crime of moral corruption
- Business which presents live performances of an offensive sexual nature; or sells products or services of a sexual nature
- Unless waived by SBA for good cause, business that has previously defaulted on a Federal loan
- Business primarily engaged in political or lobbying activities
SBA 504 Loan Terms
An SBA 504 loan has a term of either 10 years or 20 years. The proceeds determine the length of the loan.
- Machinery and equipment purchases or leasehold improvements: 10 years.
- Land purchase, construction, and/or purchasing an existing building: 20 years.
SBA 504 Structure
Typically, the SBA 504 loan requires only a 10% injection into the project. Under the 504 loan product, two loans are issued. One is the loan from the lender, and the SBA issues a separate loan. The structure for the 504 product, as a percentage of total project costs, is typically as follows:
- 50% Lender’s loan
- 40% 6 Bridges Capital Corporation/SBA 504 Debenture note
- 10% Capital injection
(Note: ineligible project costs are considered separate from total project costs. Therefore, your total injection could be more than 10%, as outside costs would have to be covered by you.)
The above structure changes based on the scope of the project. For example, the SBA will require a 15% injection from the borrower (reducing their loan to 35% of total project costs) on single-purpose buildings. A start-up business also requires a 5% increase in the borrower’s injection. Therefore, a startup business that will use a single-purpose building such as a gasoline station would require a 20% capital injection.