Loan types

The SBA 504 loan, and why it is really two loans

A 504 is a bank first mortgage, a fixed rate CDC debenture, and 10 percent down. Here is a $1,250,000 project priced against a conventional mortgage, both ways.

6 minute readUpdated 2026-07-29Written by the Exp Capital desk

A 504 is not one loan. It is two loans and a down payment stacked on a single project. A bank takes first position for about half the cost. A Certified Development Company funds about forty percent through an SBA guaranteed debenture in second position. You bring the last ten percent. That structure exists to do one thing: put a long fixed rate behind owner occupied real estate and heavy equipment.

The 504 is the narrowest SBA product and the one most owners get wrong. It cannot fund working capital. It cannot fund inventory. It cannot fund payroll. If the money is not buying a long lived fixed asset, you are looking at the wrong program and should be reading about the 7(a) program instead.

The 50/40/10 capital stack on a $1,250,000 project

How the three pieces fit together

Bank first lien, about 50 percent: A conventional loan from a bank or credit union in first position. Rate and term are negotiated with that lender, not with the SBA. Terms of 10 to 25 years, often with a rate reset or a balloon on the bank piece.
CDC debenture, about 40 percent: Funded by a Certified Development Company through an SBA guaranteed debenture sold to investors. The rate is fixed for the entire 10, 20, or 25 year term and is set when the debenture pool prices, not when you apply.
Borrower injection, 10 percent: Ten percent of total project cost is the standard. It rises to 15 percent if the property is special purpose or the business is under two years old, and to 20 percent if both are true.
Maximum debenture: $5,000,000 on the CDC piece, and $5,500,000 for small manufacturers and certain energy efficiency projects. The bank piece has no SBA cap, so total project size can run well past those numbers.
Occupancy rule: You must occupy at least 51 percent of an existing building. New construction requires 60 percent occupancy at the start and 80 percent within ten years.
Job or policy test: The project generally has to create or retain one job per $75,000 of debenture, or $120,000 for small manufacturers, or meet a listed public policy goal instead.

A $1,250,000 building, priced both ways

You are buying a $1,250,000 building you will occupy. Under a 504, the bank writes $625,000 in first position, the CDC debenture covers $500,000, and you inject $125,000. Assume 8 percent on the bank piece over 25 years and 6.5 percent fixed on the debenture over 25 years. Your combined payment is roughly $8,200 a month.

Now price the same building conventionally at 75 percent loan to value. The lender writes $937,500 at 8.5 percent over 25 years and you bring $312,500 to closing. The payment drops to about $7,549 a month. The conventional loan has the lower payment, and it costs you $187,500 more cash on the day you close.

Cash required at closing on the same $1,250,000 building

That is the actual trade, and it is not close for most operators. A quarter of a million dollars of cash left inside the business is worth more than $650 a month, especially since the conventional loan almost certainly carries a rate reset or a balloon payment at year five or ten while the debenture stays fixed for the full twenty five years. You are buying certainty and liquidity, not a lower payment.

What a 504 can and cannot fund

Yes: buying land and an existing building you will occupy, ground up construction on a building you will occupy, and building improvements or expansion.
Yes: long life machinery and equipment with a remaining useful life of at least ten years. This is the piece owners forget exists.
Yes: the soft costs attached to the project, including appraisal, environmental, title, and interest during construction, financed into the project.
Yes, narrowly: refinancing existing qualified debt on fixed assets, under a separate 504 refinance program with its own eligibility rules.
No: working capital, inventory, payroll, marketing, or general operating expenses. Not any amount, not for any reason.
No: investment property. You must occupy the building. Rental income from the balance of the space is fine, buying the building purely to lease out is not.
No: rolling stock like over the road trucks and trailers, which are financed through equipment finance rather than 504.

The real timeline and who does what

A 504 takes 60 to 120 days, and it involves more parties than any other small business loan. Two credit approvals run in parallel: the bank underwrites its first mortgage, and the CDC underwrites the SBA piece and takes it to the SBA. Neither can close without the other.

Sixty to one hundred twenty days, in order

The third party reports are the usual culprit for delay. A commercial appraisal takes three to six weeks. A Phase I environmental takes two to four weeks and can trigger a Phase II that adds a month or more. Order both the week you go under contract, not the week the lender asks. Read what an environmental report covers before you sign a purchase agreement on an older industrial site.

What has to land before a 504 can close

Fees, and where they hide

Fees on the CDC piece are almost always financed into the debenture rather than paid in cash, which is convenient and also means most borrowers never see them as a number. Expect a CDC processing fee, an SBA guarantee fee, a funding fee, underwriter fees, and closing costs on the debenture side, plus an ongoing annual servicing fee expressed in basis points on the declining balance. In total the upfront charges on the debenture typically run in the range of 2.5 to 3 percent, wrapped into the loan amount.

The bank side carries its own origination, legal, and title costs, negotiated separately. Ask each side for a written estimate of total charges and add them together yourself, because nobody in the deal produces one combined number for you.

Where it sits against everything else

Where a 504 sits on speed and cost

A 504 is the cheapest long money a small business can get and the slowest to arrange. Against a conventional commercial mortgage, the 504 wins on down payment and on rate certainty, and loses on speed and simplicity. Against a 7(a), the 504 wins on rate and on preserving your 7(a) capacity for something else, and loses whenever the project includes working capital, because a 7(a) can blend uses and a 504 cannot. The head to head is worked out in 7(a) against 504.

One more practical note on size. The fixed costs of a 504 do not shrink with the deal. On a $250,000 equipment project the structure still works out to $125,000 from the bank, $100,000 from the CDC, and $25,000 from you, but the paperwork is nearly identical to a project five times larger. Many CDCs will not take a project that small, and straight equipment paper will close in a week instead of a quarter.

What Exp Capital does with this

Exp Capital Solutions is a broker, not a lender and not a CDC. We do not price debentures, approve projects, or make SBA decisions. What we do is look at the project honestly and tell you whether 504 is the right vehicle at all, then connect the bank side and the CDC side so the two credit tracks start on the same day instead of six weeks apart. When the real answer is that your need is working capital and a 504 cannot legally touch it, we say so, even though it moves the file to a smaller deal.

Questions people actually ask

How much down payment does an SBA 504 loan require?

Ten percent of total project cost is the standard. It rises to 15 percent if the property is special purpose, such as a hotel, car wash, or bowling alley, or if the business is less than two years old. It rises to 20 percent when both conditions apply. Project soft costs count toward the total, which slightly increases your dollar injection.

Can I use an SBA 504 loan for working capital?

No. The 504 program funds long lived fixed assets only: owner occupied real estate, construction, building improvements, and machinery with at least ten years of remaining useful life. Working capital, inventory, payroll, and marketing are all ineligible. If you need both a building and working capital, a 7(a) can blend the uses and a 504 cannot.

Is the SBA 504 rate fixed?

The CDC debenture portion is fixed for its full 10, 20, or 25 year term, which is the main reason owners choose the program. The bank first mortgage is negotiated separately and is often variable or carries a reset. Your blended cost is only as fixed as the bank piece, so ask the bank directly what happens at year five and year ten.

How long does an SBA 504 loan take to close?

Typically 60 to 120 days. Two credit processes run at once, the bank on its first mortgage and the CDC on the debenture, and the debenture itself funds into a monthly pool after closing on interim financing. Commercial appraisal and Phase I environmental work drive most of the calendar, so order both early.

What is a CDC?

A Certified Development Company is a nonprofit licensed by the SBA to originate and service the debenture half of a 504 loan in a defined geographic territory. The CDC underwrites the SBA piece, takes it to the SBA for authorization, and services it afterward. You cannot get a 504 without one, and territories vary, so the right CDC depends on where the property sits.

Can I use a 504 loan to buy equipment instead of a building?

Yes, if the machinery has a remaining useful life of at least ten years and is not rolling stock. Presses, CNC machines, production lines, and commercial kitchens qualify. Over the road trucks and trailers do not. On smaller equipment projects, standard equipment finance usually closes in a week rather than a quarter and is worth pricing first.

Keep reading

7(a) vs 504Blended uses against the lowest fixed rate on the board.