What Are the SBA 504 Loan Use Requirements?
All SBA 504 loans have requirements in terms of what the funds can be used for, as well as prohibitions for use. In this article, we’ll take a look at what kind of businesses can use SBA 504 loans and what they can use them for.
Approved Uses for 504 Loans
You will find that an SBA 504 loan can only be used for some specific things. It is not the same thing as a general business loan, and there are more stringent requirements for the use of funds than with a conventional loan or a 7(a) loan. According to the SBA, the capital from a 504 loan can only be used for “fixed assets and certain soft costs”. These include things such as the following:
Purchasing an existing structure/building for your business
Purchasing real estate (land) on which to build.
Purchasing land improvements, including grading, paving, utility installation, etc. for the business, including new and currently owned properties.
Constructing new business facilities (whether as a business’ first home, or for expansion of an existing business).
Renovating existing business facilities.
Modernizing existing business facilities.
Converting existing business facilities.
Purchasing machinery for long-term business use.
Refinancing debt connected to business expansion (qualifying facilities and equipment).
As you can see, the 504 loan covers a very wide range of activities and considerations for businesses. Even if you operate a startup, or are planning to create a new business, a 504 loan may be the right way to go. However, there are some uses that cannot be funded with a 504 loan.
What Uses Are Prohibited for 504 Loan Funds?
There are specific requirements for using the funds from a 504 loan, but there are also specific prohibitions in terms of what your loan can be used to pay. The SBA specifically prohibits using the loan for:
The purchase of inventory
Note that there is a special 504 loan refinancing program in place designed to help business owners reduce their financial obligations. However, that is a separate loan subprogram, and we will discuss it later in this guide.
What Are the Minimum and Maximum Amounts for an SBA 504 Loan?
One of the most interesting things about the 504 loan program is that there is no maximum amount set. That is, the SBA does not set a cost ceiling for your project. However, CDCs are limited in terms of what they can lend, not only in terms of a percentage of your project, but also in dollar amount. There is also no minimum requirement. However, the SBA does have other loan programs designed for small dollar amounts. If you require a smaller amount for your business, you may find that a 7(a) loan, a microloan, or even a conventional loan is a better fit for your needs.
So, what are the maximum limits for CDCs? They are capped at 40% project funding, with a dollar amount of $5 million. However, if you operate a small manufacturing company, CDCs are allowed to loan up to $5.5 million per project. It should also be noted that there are no cumulative amount limits.
That is, you can take out a $5 million loan, and then if you embark on another qualifying project, particularly if you decide to go green, you can take out another $5 million loan. Theoretically, there is no limit to the number of 504 loans a business can take out, although all of them will need to meet use requirements, and the business must continue to meet eligibility requirements.