By James | Fast SBA
Quick answer: An SBA 504 loan can pay for building a new facility for your business. It works in two stages. A bank makes a short-term construction loan while the building goes up. When construction is finished, that loan is replaced by permanent financing: roughly 50% from the bank, up to 40% from a Certified Development Company (CDC) backed by SBA, and at least 10% from you. Expect to put in 15% if your business is two years old or less or the building is special purpose, and 20% if both apply. For new construction, your business has to occupy at least 60% of the building.
Fast SBA is not a lender and is not part of the U.S. Small Business Administration. Loan terms and approval are set by the bank and the CDC under SBA rules.
For the basics of the program, start with our SBA 504 Loan Guide.
How 504 construction financing works
Most 504 construction projects involve three parties and two stages.
Stage 1: construction. A bank, often called the interim lender, funds the construction. It usually covers both its own permanent share and the share the CDC will take later. You put in your contribution, and the builder draws funds as the work progresses.
Stage 2: permanent financing. Once the building is finished, the CDC’s share is funded through an SBA-guaranteed debenture. That money pays off the part of the construction loan the CDC is taking over. What remains is the permanent structure:
- Bank: about 50% of the project cost, with the first lien.
- CDC: up to 40%, with a second lien. This is the SBA-backed piece.
- You: at least 10%, sometimes 15% or 20%.
The bank’s permanent loan and the construction loan are often from the same bank, but they are separate steps. Ask your bank early whether it will do both.
How much do you need to put down?
SBA sets the minimum contribution for a 504 project:
- 10% in most cases.
- 15% if your business has operated for two years or less.
- 15% if the project is a limited or single purpose building, one designed for a specific use that would be hard to sell to another type of business.
- 20% if both of those apply.
Your contribution can be cash, or land that is part of the project. If you already own the lot you plan to build on, it may cover some or all of what you need to put in. Ask the bank and CDC how they will value it.
Lenders can ask for more than the minimum. For more on how contributions are documented, see our down payment guide.
What project costs can the loan cover?
A 504 construction project can include the land, the building itself, and the costs needed to finish it. Two items people often miss:
- A contingency reserve. You can include a reserve for cost overruns of up to 10% of the construction cost.
- Interim financing costs. Points, fees and interest on the construction loan can be part of the project cost repaid at the permanent stage.
A 504 loan cannot pay for working capital or inventory. If you also need cash to run the business while you move in, that belongs in a separate loan, such as a 7(a).
The occupancy rules for new construction
The 504 program is for buildings your business will actually use. It is not for building rental property.
For a new building, SBA’s rule is:
- Your business must occupy and use at least 60% of the rentable space right away.
- You can permanently lease up to 20% to tenants.
- You can lease the remaining space for now, but you must plan to occupy some of it within three years and all of it within ten years.
For an existing building you buy or renovate, the rule is different: you must occupy at least 51% and can lease out the rest.
If you are designing a building with space to grow into, the 60% rule shapes the size you can finance. Plan the floor space around it before you hire an architect.
The job creation goal
Every 504 project has to meet an economic development goal. The most common is jobs. The project should create or keep one job for every $90,000 of the SBA-backed CDC portion, or every $140,000 for a small manufacturer.
A project that falls short on jobs can still qualify by meeting a community development or public policy goal instead. The CDC will tell you which goal your project fits.
Loan terms, rates and fees
- Terms: 10, 20 or 25 years on the CDC portion. Real estate projects typically use the longer terms.
- Rate: the CDC portion has a fixed rate tied to 10-year U.S. Treasury rates. The bank sets the rate on its own portion.
- Fees: fees on the CDC portion total about 3% of that debt and can be financed into the loan.
- Bank portion term: when the CDC portion is 20 years, the bank’s loan must run at least 10 years.
Who qualifies?
To use a 504 loan, a business must:
- operate for profit in the United States or its possessions;
- have a tangible net worth under $20 million; and
- have average net income under $6.5 million after federal income taxes for the two years before applying.
Like any SBA loan, you also need good credit and enough cash flow to cover the new payments. For a construction project, the lender will look closely at your budget, your builder and your timeline.
504 or 7(a) for construction?
A 7(a) loan can also pay for construction. The choice often comes down to what else you need.
- Choose a 504 when the project is mostly real estate or long-life equipment and you want a low down payment and a fixed rate on a large part of the loan.
- Choose a 7(a) when the project also needs working capital, inventory or other costs a 504 cannot cover, or when the project is smaller and one loan is simpler.
Our SBA 7(a) Loan Guide covers the other side of that comparison.
How to get ready
- Get real numbers. Line up a site, rough plans and at least one contractor bid before you talk to lenders. A budget built on guesses slows everything down.
- Check the occupancy math. Make sure your business will use at least 60% of the space on day one.
- Pick a bank that does 504 construction. Not every bank makes interim construction loans. Ask directly.
- Talk to a CDC early. CDCs are local, nonprofit partners of SBA. They package the SBA side of the loan and can tell you quickly whether your project fits.
- Plan for time. Construction projects take longer than a straight purchase. See How Long Does an SBA Loan Take? for what to expect.
In a 504 loan, the project property usually secures both the bank and CDC liens, and owners of 20% or more generally sign personal guarantees. Our collateral guide explains what lenders take in general.
If you want a quick read on whether your project fits, get pre-qualified here. It takes about two minutes.
Frequently asked questions
Can you use an SBA 504 loan for new construction?
Yes. A 504 loan can pay for building a new facility your business will use. A bank usually funds the construction first, and the SBA-backed CDC portion is funded after the building is finished.
How much down payment does a 504 construction loan need?
At least 10% of the project cost. It rises to 15% if your business has operated for two years or less or the building is special purpose, and to 20% if both apply.
Can land I already own count as my down payment?
It can. SBA allows land that is part of the project to count toward your contribution. The bank and CDC will decide how it is valued.
How much of a new building do I have to occupy?
At least 60% right away. You can permanently lease up to 20% to tenants, and you must plan to occupy the rest within ten years.
Can a 504 loan cover working capital during construction?
No. A 504 loan pays only for fixed assets such as land, buildings and long-life equipment. Working capital needs a separate loan, such as a 7(a).