What Are the Steps for Applying for an SBA 504 Loan?

Convinced that a 504 loan is the best option to help your business grow and prosper? If so, then the next step is to apply for a loan. While this might seem complicated, it does not have to be. We’ll break it down into a few simple steps to make it easier on you.

• Verify Eligibility: The first thing you must do is make sure that you are eligible for the program. Note that there are quite a few reasons for disqualification, including defaulting on student loans by a major owner within the business, criminal history, owning too many assets, and poor credit.

• Check Your Credit: Note that the SBA has no credit requirements. However, the lender that you work with will. We discuss credit in the section of this site dedicated to SBA 504 loan rates.

• Find a Lender/CDC: The next step can go one of two ways depending on your desires. You need to find either a lender that offers 504 loans, or a CDC in your area that can connect you with such a lender.

• Pre-qualification: Before you start completing your SBA loan application, you should get prequalified. Your CDC or lender can do this for you. To prequalify you, the CDC will need:

• Three years of personal and business tax returns

• Interim financial documents

• A personal financial statement

• Decide on Your Purchase: With the pre-qualification in hand, you can begin looking at purchase options, vetting contractors, comparing equipment choices, and more.

• Complete the Application: Once you’ve decided on what you’re purchasing and have been prequalified, you can begin the application process. You’ll work with your CDC and/or lender to complete a full SBA loan application. You will also finalize what you are seeking in loan terms at this time. There are quite a few things that will be addressed during the application process, although some will have been touched on during pre-qualification. These include:

• Your creditworthiness

• Your business’s eligibility for the 504 loan program

• Your business’s current level of indebtedness

While the CDC will complete some of the application, you, the borrower, must initiate the process. The loan application can be downloaded from the SBA as a PDF file here. completed, and then delivered to your CDC.

• Find a Lender: If you have not yet done so, now is the time to get a lender. If you choose to go with a CDC first, make sure there is a Financing Contingency built into your contract so that you have ample time to get your lending situation in order. Note that your CDC should be able to help you find a lender if you do not yet have one. Also note that the lender will need a wide range of paperwork and documents in order to move the process along. You will need:

  • A loan total

  • A list of how those funds will be used

  • One to three years of financial projections

  • A current cash flow statement

  • A current P&L statement

  • Copies of your business license and lease (if applicable)

  • A current balance sheet

  • Two years of business tax returns

  • Two years of personal tax returns (per owner)

  • Personal financial statement (per owner)

  • A resume (per owner)

  • A detailed business plan

  • Proof of business ownership

  • Financial and ownership documents if any owner also owns 20% or more of another business

  • Financial documents for the business being purchased (if applicable)

  • If you are purchasing real estate, you will need:

• An appraisal

• Maintenance expenses

• Real estate purchase agreement

• Environmental studies

• Property condition report

• Leases for any other tenants on the property

• Plans for construction or remodeling

• Receive Your Letter of Intent: After submitting your application and all the documents the lender requires, you’ll receive what’s called a letter of intent, or LOI. This will spell out what your terms are, what interest rate is being offered (officially), and more. You may also need to make a deposit at this time, which will be deducted from your 10% down payment at closing.

• Underwriting: The next step is for the loan to go through underwriting. This can be a very lengthy process, so have patience, and depend on your lender and the CDC to keep you in the loop. During this time, the underwriter will research you and any other business principals, the property in question, and other vital considerations. The goal here is to make sure that there are no hidden issues that add significant risk.

• Bridge Loan: In almost all instances, you will need to take out a bridge loan to help ensure that you’re able to close escrow quickly. The fees and interest associated with the bridge loan will be paid from your 504 loan, during final funding. Your CDC should arrange for the bridge loan, but make sure you communicate with them about it. When the bridge loan is paid, you will need new title insurance issued, as well as a reconveyance of your deed of trust.

• Closing: Once the underwriting process is done, you will be notified of when closing will occur. At this time, you will meet with an escrow officer and sign all the closing documents.

As you can see, while there are quite a few hoops to jump through, the process is really not that dissimilar from obtaining other types of funding. The most important things to remember are to be patient, and to make sure that you have good lines of communication with your CDC and your lender.