SBA rules · SOP 50 10 8.1
What are the SBA 504 loan requirements?
An SBA 504 project provides long-term fixed-asset financing typically structured as a 50% senior loan from a Third Party Lender, up to 40% from an SBA-guaranteed CDC debenture, and a minimum 10% borrower contribution, subject to job creation or public policy objectives.
Quoted from SBA SOP 50 10 8.1Every quote checked word for word
In detail
- Project structure: A standard 504 project combines a Third Party Lender providing 50% or more of the financing, a Certified Development Company (CDC) debenture covering up to 40% (guaranteed 100% by SBA), and an applicant injecting at least 10%, with no more than 50% of eligible project costs coming from Federal sources.
- Borrower contribution: The borrower contribution is at least 10% for standard projects, increasing to 15% if the project involves a new business or a limited or special purpose property, and to 20% if it involves both a new business and a limited or special purpose property.
- Borrowed equity rules: The borrower's contribution may be borrowed if subordinated to the Third Party Loan and debenture; however, if the borrowed contribution is secured by the Project Property, it cannot be repaid at a faster rate than the 504 loan without prior written approval from SBA.
- Eligible uses: 504 financing is limited to fixed assets such as land acquisition, site improvements, building purchases, new construction or renovations, machinery and equipment with a useful life of at least 10 years, essential furniture and fixtures, necessary professional fees, and eligible debt refinancing with or without expansion.
- Economic development: The project must satisfy an economic development objective, generally requiring the creation or retention of one job opportunity per $95,000 guaranteed by SBA (or $150,000 for Small Manufacturers and Energy Public Policy Projects), or meet a community development or public policy goal while maintaining the CDC's overall portfolio job average.
The source
What the SOP says
“A 504 project has three main partners and generally: a Third Party Lender provides 50% or more of the financing; a Certified Development Company (CDC) provides up to 40% of the financing through a 504 debenture (guaranteed 100% by SBA); and an applicant (Borrower) injects at least 10% of the financing (13 CFR §§ 120.801 and 120.900). No more than 50% of eligible Project costs can be from Federal sources (13 CFR § 120.930(a)).
“All Borrowers must contribute at least 10%, which may be borrowed as long as it is subordinate to the Third Party Loan and the 504 debenture;
“New businesses must contribute at least 15%. The Debenture will finance no more than 35% of the Project and at least 50% of the Project financing will be from banks or other financial institutions, state or local government, or foundations or other non-profit institutions.
“If a Project will finance both a New Business and a Limited or Special Purpose Property, the Applicant must contribute at least 20% of the Project cost. The Debenture will finance no more than 30% of the Project and at least 50% of the Project financing will be from state or local government, banks or other financial institutions, foundations or other non-profit institutions.
“Only in situations where the borrowed contribution is collateralized by the Project Property, Borrower may not pay the loan for its contribution at a faster rate than the 504 loan (13 CFR § 120.912) unless it is approved in writing by the D/FA or designee;
“The machinery and equipment must have a useful life of at least 10 years;
“A Project must create or retain one job opportunity per $95,000 guaranteed by SBA except that, in the case of a Project of a Small Manufacturer (defined as a small business with its primary NAICS Code in Sectors 31, 32, and 33 with all its production facilities located in the United States) or a project that meets an Energy Public Policy Goal, the Project must create or retain one job opportunity per $150,000 guaranteed by SBA.
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This page quotes the SBA's Standard Operating Procedure 50 10 8.1. Lenders can ask for more than the SBA minimum. It is general information, not a loan approval or legal advice.