# SBA 504 loan program

> Long-term fixed-rate financing for major fixed assets (owner-occupied commercial real estate, heavy equipment) structured as 50% bank loan + 40% SBA debenture through a Certified Development Company + 10% borrower equity, with debenture rates near 6% in 2026.

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](https://fundnode.co/llms/glossary/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)](https://fundnode.co/llms/glossary/sba-cdc-certified-development-company) — 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](https://fundnode.co/llms/glossary/sba-7a-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](https://fundnode.co/llms/glossary/sba-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

- [SBA 504 Loan Program — Official Page](https://www.sba.gov/funding-programs/loans/504-loans)
- [NADCO — National Association of Development Companies](https://www.nadco.org/)

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Document: SBA 504 loan program — Fundnode MCA Glossary
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