The SBA 504 loan program offers several benefits to businesses, including long-term, fixed-rate financing, lower interest rates and down payment requirements than SBA 7(a) loans and Express loans, and the ability to purchase fixed assets such as real estate and equipment. The loan is also backed by the SBA, reducing risk for lenders who put up half the cost of the project. In the case of default, the private lender has first lien on project assets. Terms for SBA 504 financing are typically 10, 15, or 20 years, and the loan is fully amortized without a balloon payment.

Sources:

• What Is an SBA 504 Loan?
• SBA 504 Loans: What You Need to Know

The drawbacks of an SBA 504 loan include:

• Application Process: The 504 program is not the most streamlined in the world, largely due to the need to have three parties involved. It’s not just you working with a lender, as it would be with a conventional loan. Both the CDC and the lender must agree on terms, and ensure that they are in compliance with SBA requirements.
• Underwriting: All SBA 504 loan underwriting goes through a single office. As you can imagine, that sometimes leads to bottlenecks. However, the underwriters are also exceptionally thorough and will question anything that seems out of the norm, or that needs further clarification. The more questions or concerns the underwriter has, the more involved the lender, CDC, and you must be in the process.
• Time: It should be noted from the outset that SBA real estate loans are not fast. In contrast to a home mortgage loan, which might close in just 30 days, it often takes around 60 to 75 days to close on an SBA real estate loan and receive your funding.

The SBA 504 loan isn't the only option out there when it comes to funding your business. Common alternatives to SBA 504 loans include:

• SBA 7(a) loan: SBA 7(a) loans are generally more flexible and somewhat easier to get approved for than SBA 504 Loans. Like 504 loans, 7(a) loans are offered in amounts of up to $5 million. While they do have significantly higher interest rates than 504 loans, 7(a) loans can be used for a wider variety of purposes, including working capital.
• SBA 7(a) Express loan: SBA 7(a) express loans, also known simply as SBA express loans, are similar in nature to traditional 7(a) loans, but can get approved much, much faster. However, unlike regular 7(a) loans, these loans have a maximum loan amount of $350,000.
• SBA CAPLines: These are fixed or revolving lines of credit that are guaranteed by the SBA. Offered in amounts of up to $5 million, CAPLines can have terms of up to 10 years (or 5 years for builders).
• Conventional loans: If you don’t qualify for SBA financing, there’s still a whole world of non-SBA loan options out there.
• Patriot Express Loans: While the program expired in 2013, the Patriot Express loan was a variant of the SBA express loan that provided veterans and active duty service members up to $500,000 to finance their business.
• SBA Microloans: SBA microloans are offered in amounts up to $50,000, and are significantly easier to obtain than larger SBA loans, like the SBA 7(a) and the SBA 504 loan.

You can find a full discussion and comparison of the various alternatives available from the SBA here.

In order to take out an SBA 504 loan, your business must meet the following eligibility requirements:

• Your business must be a for-profit organization.
• Your business must meet current SBA size standards.
• Your business’ net worth cannot exceed $15 million.
• Your business cannot earn 1/3 or more of its income from packaging SBA loans.
• Your business must earn an average of $5 million or less per year (after taxes, and only for the preceding two years).
• Your business cannot be engaged in any sort of passive or speculative activities.

Note that additional requirements may be placed by CDCs or conventional lenders. You can find a full list of eligibility requirements and other important information with the SBA here.

The main advantage of an SBA 504 loan is that it offers interest rates below market rates and they’re fixed. Additionally, SBA 504 loans can be used for both owner-occupied and investment properties under certain conditions. Loans can range up to $15 million dollars with terms of 25 years.

For more information, you can find a full discussion and comparison of the various alternatives available from the SBA here.