How The SBA 504 Program is Helping Businesses Sell

A business owner has a willing buyer. That’s half the battle.

But the buyer is a little short of cash and some of the assets are intangible, making them hard to finance. What can you do to make the deal happen?

One of the most difficult pieces of putting together the puzzle of a business sale is finding all the funding you need. The Small Business Administration 504 loan program can be the key piece that will make the rest fall into place.

The 504 program is one of the SBA’s lesser known programs. Instead of a guarantee, it’s a direct loan of up to 20 years to finance up to 40 percent of a purchase of property and equipment. A bank lends the other 60 percent.

To qualify, the business must be a U.S.-based business, and the property has to be over 51 percent owner occupied, meaning rental real estate does not qualify. However, the owner may rent commercial units or apartments in the building as long as the business itself occupies more than the 51 percent.

Other requirements include the creation or retention of jobs or location in an area targeted for economic development. The business entity must meet SBA standards for small businesses, with net income under $5 million and assets under $15 million.

The purchase of a business is of great interest to the SBA because it fosters continuity and maintains jobs that would be lost should the business close. Generally, the business must create or retain one job for every $65,000 borrowed. In the case of a manufacturing company, one job is required for every $100,000.

Rural businesses, companies in urban redevelopment areas, or those with ownership by veterans, minorities or women, are examples of projects with economic development impact.

One of the key benefits of a 504 loan is the owner-equity requirement of 10 percent, much lower than the 20-25 percent often required by banks. If the property is special-purpose, i.e. only one use possible, the equity requirement increases 5 percent. A 504 won’t fund inventory, working capital or goodwill, but will allow owner-financing for a portion of the deal as long as the terms and conditions don’t adversely impact cash flow. Renovations and new construction are eligible uses of the loan.

Interest rates on 504 loans are pegged to 5- and 10-year Treasury issues and fixed for five years. They are often much lower than bank rates. Fees of 3 percent can be rolled into the loan.

To obtain a 504 loan, a buyer must find a bank that works with the SBA, hopefully a preferred lender, which will expedite the process. The 504 loan itself is originated through a Certified Development Company (CDC). These organizations are certified by the SBA to approve SBA-guaranteed loans. The CDC makes the loans, bundles them and sells them on the market as SBA-backed securities. The CDC will often continue to service the loan after it is sold, although payments may be made to the bank.

The point of contact for the buyer is the bank loan officer who will process the bank portion of the loan package and collect the information required for the 504 loan.

The borrower does not work directly with the CDC. Although the 504 loan does require a good amount of paperwork, working with an experienced loan officer and CDC will streamline the process.

Requirements for the application include:

  • SBA application
  • Personal financial statement, personal history and resumes for all owners of over 20 percent
  • Personal income tax returns for previous three years
  • Business plan and cash flow projections that show the benefit of the 504 loan to the business
  • Current balance sheet and P&L statement of business to be purchased
  • Previous two years’ income tax returns for the business
  • Proposed bill of sale including terms of sale
  • Schedule of inventory, machinery, equipment, furniture and fixtures
  • Bank-ordered appraisal used for both loans

SBA 504 loans aren’t right for all business sales. But when used correctly, they can help marginal buyers qualify while ensuring that the business can adequately cover debt and remain cash flow positive.

To learn more about the SBA 504 loan program and locate CDCs and preferred lenders, visit