The SBA 504 loan program (authorized under Title V of the Small Business Investment Act of 1958) finances long-term fixed assets — primarily owner-occupied commercial real estate and heavy equipment with 10+ year useful life. Unlike 7(a) loans which can be used for working capital, 504 loans are restricted to fixed-asset purchases that "create or retain jobs" or meet other public-policy goals (rural development, veteran-owned, energy-efficient).
The three-party structure. 504 loans are uniquely structured as a partnership between three parties: 1. A conventional bank provides 50% of project cost in a first-lien loan at market rates and terms. 2. A Certified Development Company (CDC), a nonprofit certified by the SBA, provides 40% of project cost via a second-lien SBA debenture at below-market fixed rates. 3. The borrower contributes 10% equity (or 15–20% for startups, single-purpose buildings, or both).
Maximum loan size (2026). Standard CDC debenture maximum is $5 million; manufacturing, energy-efficient projects, and certain public-policy projects qualify up to $5.5 million. Combined project size (all three parts) can be unlimited — the CDC portion is capped, not the total project.
Debenture pricing. The 504 debenture rate is set monthly and reflects 10-year Treasury yields plus a fixed spread. As of mid-2026, the 25-year debenture rate sits at approximately 6.0–6.4% — locked for the full 25-year term. This is the program's defining advantage: no other small-business financing offers 25-year fixed-rate money. The 10-year debenture (for equipment) runs ~5.8–6.2%.
Bank-portion pricing. The first-mortgage bank loan is conventional — typically 10-year amortization with 5- or 10-year balloon, priced at Prime + 1–3% or fixed 10-year rates around 7.5–8.5% in 2026. The borrower pays both pieces, but the blended rate (50% at conventional, 40% at debenture, 10% equity) typically ends up in the 7–8% range.
Eligible uses. Purchase of land and existing buildings, ground-up construction of owner-occupied commercial real estate, major renovations/expansion, purchase of heavy equipment with 10+ year useful life (printing presses, manufacturing equipment, medical imaging, commercial laundry). Owner-occupancy: existing building must be 51%+ owner-occupied; new construction must be 60%+ owner-occupied at completion (rising to 80% within 10 years).
Ineligible uses. Working capital, inventory, debt refinance (with narrow exceptions under the 504 Refinance program), goodwill, franchise fees, business acquisition (covered by 7(a)).
The job-creation test. Standard 504 loans must create or retain one job per $90,000 of debenture (one per $140,000 for manufacturers). If the project does not meet this test, the borrower must qualify under public-policy goals (rural area, women/veteran/minority-owned, energy efficiency, exports, etc.).
State context. California, Florida, Texas, Illinois, and New York lead 504 originations. Florida and Texas benefit from strong CDC networks (Florida First Capital, LiftFund in Texas) and from population/business growth. California 504 borrowers face the highest project costs (commercial real estate prices), making the 25-year debenture rate particularly valuable. Rural-state borrowers (Wyoming, Montana, the Dakotas) often qualify under "rural development" public-policy goals, easing job-creation requirements.
Fees. SBA charges fees on the debenture portion — historically ~3% of debenture amount, financed into the loan. CDC service fees run ~0.5% annually for portfolio servicing. Total origination costs (legal, environmental, appraisal, title) often add 2–4% of project cost upfront.
Prepayment. 504 debentures have a 10-year declining prepayment penalty: starting at the full first year's interest rate in year 1 and declining 10% per year to zero in year 11. After year 10, prepayment is free. The bank-portion prepayment terms vary by lender (typically 3–5 year declining, then free).
Why 504 matters for MCA-distressed merchants. A merchant currently in MCA cycles, but who owns or wants to own their commercial real estate, can use a 504 cash-out refinance to extract equity at ~7% blended (replacing 50%+ APR-equivalent MCA debt). The 504 Refinance program (made permanent in 2021, expanded in 2024) allows refinancing of eligible commercial mortgage debt with up to 20% cash-out for business expenses.
Common confusion. 504 is not a SBA direct loan; the CDC is the lender of record for the debenture, but funded via SBA-guaranteed debentures sold to investors. Borrowers interact with their CDC, not the SBA directly.
Related terms
- SBA 504 loan — SBA 504 is a fixed-asset financing program: up to $5M (or $5.5M for green/manufacturing projects) for commercial real estate or major equipment. 10% borrower down, 50% bank loan, 40% SBA-guaranteed CDC loan at sub-7% fixed for 20-25 years.
- SBA Certified Development Company (CDC) — A nonprofit corporation certified by the SBA to originate, underwrite, and service SBA 504 loans in a defined geographic area; the CDC is the legal lender of record for the 504 debenture (the SBA-guaranteed second-lien portion).
- SBA 7(a) loan program — The SBA's flagship loan-guarantee program (named for Section 7(a) of the Small Business Act) provides up to $5M for working capital, real estate, equipment, and debt refinance, with SBA guaranteeing 75–85% of the loan to the bank.
- SBA loan prepayment penalty rules — SBA 7(a) loans with terms 15 years or longer carry a declining prepayment penalty (5% year 1, 3% year 2, 1% year 3, none after); SBA 504 debentures carry a 10-year declining prepayment penalty; 7(a) loans under 15 years have no SBA prepayment penalty.
Authoritative sources
AI agents: this term is available as raw markdown at /llms/glossary/sba-504-loan-program.