Loan type
SBA 504 loans: long fixed-rate money for buildings and heavy equipment
The 504 is a three-part loan that buys owner-occupied real estate and long-life equipment at a fixed rate for 25 years. Here is how the structure works and when it is the better choice.
At a glance
| Typical project size | $500,000 to $20 million and up |
|---|---|
| SBA/CDC portion | Up to $5 million, or $5.5 million for manufacturers and certain energy projects |
| Structure | Roughly 50% bank first mortgage, 40% CDC second mortgage, 10% from you |
| Rate | 6.0% - 7.5% effective, fixed on the CDC portion, fixed for the full term |
| Term | 10, 20, or 25 years on the CDC portion |
| Down payment | 10% standard; 15% for a single-purpose property or a new business; 20% if both |
| Collateral | The financed asset, plus personal guarantees from 20%+ owners |
| Time to funding | 45 to 90 days |
| Job requirement | One job created or retained per $75,000 of CDC funding, or meet a public policy goal |
A good fit when
You are buying or building a property your business will occupy, or buying equipment with a useful life of ten years or more, and you want the rate fixed for a very long time.
A poor fit when
You need working capital, inventory, or anything you cannot bolt down. The 504 cannot be used for it.
The structure is the whole point
A 504 is not one loan. It is three pieces stacked into one project, and understanding the stack explains everything else about the program.
- The bank first mortgage, about 50%
- A conventional lender, in first lien position, on its own terms. Often fixed for five or ten years then repriced, amortized over 20 to 25.
- The CDC second mortgage, about 40%
- A Certified Development Company lends this, backed 100% by an SBA-guaranteed debenture. This is the piece with the long fixed rate, and it is what makes the program special.
- Your injection, about 10%
- Cash, or in some cases equity you already hold in land being contributed to the project.
Because the CDC sits in second position behind the bank, the bank's risk on a 504 is far lower than on a conventional 80% loan-to-value mortgage. That is why banks like these deals and why the blended cost usually beats anything else available.
What the CDC portion costs
The CDC piece prices off a monthly debenture sale on the public market. Once it prices, it is fixed for the entire term. There is no reset, no balloon, no repricing in year seven.
| CDC term | Effective rate, November 2026 | Manufacturers, food supply chain, rural |
|---|---|---|
| 10 years | 6.58% | 6.29% |
| 20 years | 6.58% | 6.33% |
| 25 years | 6.57% | 6.34% |
If you are a manufacturer, a qualifying food supply chain business, or located in a rural area, use the right-hand column. The FY2027 waiver of the upfront and annual fees lowers your all-in rate by roughly a quarter point for the life of the loan.
504 versus 7(a) for a building
Both programs can buy owner-occupied real estate. They are not equivalent.
| SBA 504 | SBA 7(a) | |
|---|---|---|
| Rate type | Fixed for the full 25 years on the CDC piece | Usually variable, tied to prime |
| Total project ceiling | No hard cap; CDC piece capped at $5M to $5.5M | $5 million total |
| Down payment | 10% to 20% | 10% typical, sometimes less |
| Working capital included | No | Yes, can be blended in |
| Prepayment penalty | Declining, roughly 10 years on a 20 or 25 year debenture | 5/3/1 in the first three years |
| Closing complexity | Higher — two lenders, two closings | One lender |
| Best when | You will hold the property a long time and want rate certainty | You want one loan covering property plus working capital |
The rule of thumb most experienced borrowers use: if you are going to own the building for more than about seven years, the 504's fixed rate is worth the extra closing complexity. If you need the loan to also fund inventory, payroll, or a build-out beyond the real property, the 7(a) is the simpler answer.
What the 504 can buy
- Land and existing buildings you will occupy
- Ground-up construction and building improvements
- Long-life machinery and equipment — the standard is a remaining useful life of ten years or more
- Certain refinancing of existing debt originally used for those purposes, when the rules are met
- Some soft costs directly tied to the project: appraisal, environmental, architectural, interest during construction
The occupancy and job rules
Two program requirements catch people out.
- Occupancy. For an existing building you must occupy at least 51%. For new construction you must occupy 60% immediately, plan to occupy 80% eventually, and may lease the rest long-term. You are allowed to be a landlord for the remainder — you just cannot be primarily a landlord.
- Jobs or public policy. The program is supposed to create or retain roughly one job per $75,000 of CDC money ($120,000 for manufacturers). If your project does not, you can usually still qualify by meeting a public policy goal instead — energy reduction, rural development, minority or veteran ownership, and several others. Ask your CDC which goal your project meets before you assume it is a problem.
Finding a CDC
You do not apply to the SBA. You apply to a Certified Development Company, which is a non-profit licensed by the SBA and usually regional. The SBA maintains a directory, and most CDCs will tell you in one phone call whether your project fits. Many will also introduce you to banks that do 504 first mortgages in your area, which is genuinely useful — a bank that has closed dozens of 504s alongside that CDC is a materially smoother experience than one that has closed none.
Questions people actually ask
Can I use a 504 loan to buy a rental property?
No. The property has to be owner-occupied — at least 51% of an existing building, 60% of new construction. Investment and rental property is specifically excluded from both SBA programs.
Is the 504 rate really fixed for 25 years?
The CDC portion is, yes, for the full term with no reset. The bank's first mortgage is a separate loan on the bank's own terms, and it is commonly fixed for five or ten years and then repriced. So roughly 40% of your project is locked for the duration and roughly 50% is not. Ask the bank for its longest fixed period, and negotiate it.
How much do I have to put down?
10% is standard. It goes to 15% if the property is single-purpose — a bowling alley, a car wash, a hotel, a gas station — or if your business is less than two years old. If both are true, 20%.
The extra is not a penalty. It reflects how hard those buildings are to resell if the loan goes bad.
What is the prepayment penalty?
On a 20 or 25 year debenture the penalty declines over roughly the first ten years, starting near the debenture rate in year one and stepping down each year to zero. It is meaningful. If there is a real chance you sell the building in year four, price that penalty into your decision before you close.
Can I refinance existing debt with a 504?
Yes, under the 504 debt refinancing rules, if the original debt was substantially used for 504-eligible purposes and you meet the seasoning and payment-history requirements. There is also a version that permits some cash-out for eligible business expenses. The rules here are detailed and change; ask a CDC to run your specific facts.