FAQ – Eligibility for SBA 504 Loans

How does the SBA define “small business ”?

For purposes of an SBA 504 loan, a business qualifies as “small” if it is a for-profit enterprise; is independently owned and operated; does not dominate in its field; does not have a tangible net worth in excess of $7.5 million, and does not have an average net income in excess of $2.5 million, after federal taxes, for the two preceding years. The SBA will make loans to sole proprietorships, corporations, partnerships, limited liability companies and combinations thereof. For example, a common loan structure is to have a Limited Liability Company own the real estate, and lease it back to an Operating Company, which is an S-Corp.

Do “start-up” companies qualify for a 504 loan?

Because the eligible uses for an SBA 504 loan are limited to real estate and machinery/equipment (excluding office equipment and computers), the loan program is primarily geared towards existing businesses which are seeking to expand. Start-up companies are not excluded from using an SBA 504 loan, however, the SBA will require a higher level of equity participation from the company than the 10% minimum.

Is an applicant with personal liquidity disqualified from receiving funds through the SBA 504 loan program?

A three-level system based upon the size of the total financing package is used to calculate when liquid assets must be used by the borrower to reduce the SBA portion of the package. Liquid assets include: cash, savings accounts, CDs, marketable securities, and cash surrender value of life insurance. Assets that are NOT considered liquid include: real estate, closely-held non-marketable stocks, IRAs, 401(K) or Keogh Plans or other retirement accounts established within 120 days of the SBA application. The SBA requires personal resources to be injected into the total financing package when the owner's liquid assets exceed the amounts below:

Total Financing Package Personal Liquid Assets injected into
the project must be:

$250,000 or less: The greater of 2x the total financing package, or $100,000.

$250,000 - $500,000: The greater of 1.5x the total financing package, or $500,000.

$500,000 or more: The greater of 1x the total financing package, or $750,000.

Is an applicant automatically ineligible if they have had a prior bankruptcy?

If the bankruptcy was more than five years ago, and if there is a satisfactory explanation for it, the applicant may still be eligible for the SBA 504 loan program.

I own my building on a Contract for Deed. May I use the SBA 504 loan to purchase the building when the balloon payment comes due?

An SBA 504 loan may only be used to finance new construction or new purchase of a building. Loan proceeds may not be used to refinance existing debt. Any debt older than nine months at the time the SBA application is submitted is considered refinance.

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