Buying commercial real estate can feel out of reach for many small business owners, especially when conventional lenders require 20% to 35% down. But the SBA 504 loan program offers a different path, one that lets qualifying businesses purchase owner-occupied property with as little as 10% down and lock in a long-term fixed rate for up to 25 years.
Dennis Breitrick, Vice President and Business Development Officer at BDC Capital / CDC New England, recently sat down with Brandon Rush on The Agent Investor podcast to walk through the SBA 504 program in detail. Here are the key takeaways from their conversation.
How the SBA 504 Loan Structure Works
The SBA 504 program is built around a three-party financing structure. A conventional lender, typically a bank, provides up to 50% of the total project cost in a first mortgage position. A Certified Development Company (CDC) like CDC New England provides up to 40% through an SBA-guaranteed loan in second position. The borrower contributes the remaining 10% as a down payment.
"It's a low down payment compared to conventional commercial real estate lending or other loan types where the down payment might be 20, 25, 35%," Breitrick explained. "This is 10% down. So it helps business owners to conserve cash upfront and kind of boost their post-closing cash reserves."
The CDC's portion is fixed for the full loan term and fully amortizing, meaning there are no balloon payments. For real estate, the term is 25 years (with a 20-year option also available). For equipment, the term is 10 years.
Banks set their own terms on the first mortgage, but they are required to offer a minimum 10-year term. Most commonly, banks provide a five-year fixed rate with a 25-year amortization that resets after the initial period based on an index like the Federal Home Loan Bank of Boston rate.
Who Qualifies for an SBA 504 Loan?
The property must be owner-occupied, meaning the business must use at least 51% of the total square footage. Tenants can occupy the remaining space, but the business owner's operations must be the primary use.
Size eligibility is straightforward. Breitrick noted that about 98% of businesses qualify. The requirements are a tangible net worth under $20 million and average net income under $6.5 million, however, there are alternative size standards for certain industries, if you don’t meet these thresholds.
The program is available to for-profit entities across nearly every industry. Breitrick listed restaurants, manufacturers, service businesses, retail shops, car dealerships, laundromats, car washes, gas stations, breweries, hotels, golf courses, sports facilities, campgrounds, quarries, marinas, and self-storage operations as examples of recent projects.
Cannabis and adult entertainment businesses are not currently eligible because the SBA is a federal program. Nonprofits are typically not eligible as well.
What About Startups and New Businesses?
Startups are eligible for SBA 504 loans, though the structure adjusts slightly to account for risk. A startup entity, defined as a company in operations less than two years without extensive industry experience, is required to put 15% down instead of 10%. In that case, the bank still covers 50% and the CDC portion drops to 35%.
The same 5% increase applies to special use properties, meaning buildings that cannot easily be converted to other uses, such as amusement parks, buildings with pools, or marinas. If a project is both a startup and special use, the down payment goes to 20%.
For startup applicants, the CDC will review a business plan, projections for the first two years, a resume demonstrating industry experience, and information about key employees and the target market.
SBA 504 Loans for Construction and Expansion
The program covers more than just purchases of existing buildings. Ground-up construction is a common use of SBA 504 financing. Borrowers who plan to buy land and build will work with engineers, architects, and construction companies to assemble cost estimates, and those total project costs become the basis for the 50/40/10 financing split.
Additions and expansions to existing buildings are also eligible. If a business already owns its building and wants to put on an addition, the CDC can structure a refinance with expansion to incorporate the construction costs.
For construction projects, the SBA now allows a contingency of up to 15% of the project cost (increased from the previous 10% cap). This gives borrowers a cushion for cost overruns on materials or labor. If the contingency is not needed, the loan amount simply comes in lower on day one.
How Long Does the SBA 504 Loan Process Take?
Breitrick encourages borrowers to get him involved as early as possible so expectations can be set on structure, down payment, and any special requirements.
The application package typically includes two years of business and personal tax returns, a personal financial statement, and the purchase and sales agreement. If construction is involved, those estimates and plans are gathered as well.
From there, the CDC's credit team reviews the file in about one to two weeks and makes a recommendation to the board. The board votes electronically, so there is no waiting around for a monthly meeting. After board approval, the file goes to the SBA for formal approval. Meanwhile, the bank orders the appraisal and environmental report, naming the SBA and CDC as additional intended users to avoid duplication.
Assuming positive outcomes on cash flow, collateral, credit history, and due diligence, the file moves to attorneys for document preparation. The average timeline from start to close is about 60 days.
Recent and Upcoming SBA 504 Program Changes
The SBA regularly updates its policies, and several recent changes are worth noting for business owners and bankers:
Veteran-owned business priority. The SBA is now prioritizing files from veteran-owned businesses, picking them up and working on them in real time.
Streamlined environmental reviews. For low-risk properties with a "no further action" environmental finding, the SBA now accepts the CDC's approval rather than requiring its own review. This speeds up the process.
Franchise directory reinstated. The SBA has reintroduced the franchise directory, making it easier for franchise borrowers (Dunkin', Jersey Mike's, and similar brands) to move through the process if their franchisor is already on the approved list.
U.S. citizenship requirement. The SBA now requires all borrowers to be U.S. citizens. Previously, legal permanent residents were also eligible. This is a significant change to be aware of during the application process. The Senate is introducing a bill to change this and hopefully allow for Lawful Permanent Residents to be added back to the eligible borrower list.
Increased refinance cash-out. Borrowers can now access up to 90% loan-to-value on a refinance, up from the previous 80% cap, allowing business owners to maximize the equity in their property.
Reduced guarantee fees for manufacturers. Manufacturing companies now receive a half-point reduction in the SBA guarantee fee and a lower fixed rate. These fees can be rolled into the loan amount, so they do not require additional out-of-pocket expense at closing.
Easier access for affiliated businesses. The SBA has relaxed some of the rules around affiliates, making it simpler for owners of multiple businesses to access 504 financing.
Several additional proposals are still working through the legislative process, including increasing the maximum 504 loan amount for manufacturers from $5.5 million to $10 million, reducing the manufacturer down payment to just 5%, lowering the owner-occupancy requirement for manufacturers from 51% to 50%, and eliminating the extra 5% down payment for special use properties.
Tips for Business Owners Considering an SBA 504 Loan
Breitrick's top advice for prospective borrowers: assemble your team early. That means getting your CPA involved to pull together tax returns and interim financials, working with an experienced commercial real estate agent to handle the purchase and sales agreement, and consulting with an attorney on legal contracts and negotiations.
Planning ahead makes a big difference. Rather than rushing into a deal on a tight timeline, Breitrick recommends sitting down at the start of the year with a business plan and projections to evaluate how realistic a project is before getting too deep into the process.
Connect With CDC New England
CDC New England has been helping small businesses across New England access SBA 504 financing since 1981. As the only Premier Certified Lender serving Connecticut, Massachusetts, New Hampshire, Rhode Island, and Vermont, we partner with banks throughout the region to structure deals that help business owners stop renting and start building equity.
To learn more about how an SBA 504 loan can work for your business, contact CDC New England or reach out to Dennis Breitrick directly at (203) 824-1755 or dbreitrick@bdcnewengland.com.
Watch the full interview on The Agent Investor with Brandon Rush.
