SBA 504 Loan

The SBA 504 loan program finances owner-occupied commercial real estate and heavy equipment through a structure combining a conventional bank loan (50% of project cost), a below-market, government-guaranteed second mortgage from a Certified Development Company (up to 40%), and a small business down payment (typically 10%). It offers long-term, below-market fixed rates but requires the borrower's business to occupy at least 51% of the property.

SBA 504 is purpose-built for small businesses buying or building the real estate they operate out of, rather than for pure real estate investors — the defining eligibility requirement is that the business itself must occupy at least 51% of an existing building (60% for new construction), which rules out the program for passive investment properties.

The two-loan structure is what makes 504 distinctive: a bank or credit union funds the senior 50% position at market terms, while a Certified Development Company (a nonprofit SBA partner) funds a second-position loan backed by an SBA guaranty, typically at a long-term fixed rate below what conventional commercial financing alone would offer. This structure lets small businesses put down as little as 10% (versus the 20–30%+ conventional commercial lenders often require), preserving cash for working capital.

Because the CDC second mortgage is fully amortizing over a long term (10, 20, or 25 years) and fixed-rate, 504 borrowers avoid balloon and refinance risk entirely on that piece of the debt stack, a meaningful advantage over conventional commercial real estate financing structures.

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