What Can SBA 504 Loans Be Used For?

Many small business owners are not aware of the SBA 504 loan and the financial benefits it offers in terms of business growth, expansion, and long term cost savings. But is the 504 loan right for your business?

The short answer is yes.. Most for-profit small to mid-sized businesses are eligible for a 504 loan. What follows is a longer answer, which outlines how a 504 loan can be used and how it can meet your business’ unique needs.

The Small Business Administration’s 504 loan has a fixed, below-market rate and can be used for a wide variety of purposes involving major expenditures. Most often, the 504 program is used to purchase commercial real estate for your business, however, it can also be used to construct new facilities, purchase equipment, upgrade your facilities or add clean energy efficiencies to your building.

Land and Construction

Due to the unique capabilities of the 504 loan, you can finance both the purchase of raw land and subsequent building construction. This way,  business owners can meet the particular needs and specifications of their individual businesses, in terms of both location and facilities. For example, here are some scenarios where TMC’s clients were able to finance the land and construction costs for a brand new facility, tailored to meet their unique needs:

  • Matt’s Car Wash Express purchased land and financed the construction of their fourth  location;
  • Blazing Saddles, a bike tour company, demolished their current operating location and built a new one from the ground up to create space exactly how they wanted it;
  • Green Acres Elk Grove, a plant nursery purchased land and constructed a building for their fourth operating location;
  • A restaurant, Nora’s Cuisine, was unable to purchase the space they were currently leasing, so purchased land two blocks away and built a restaurant designed just the way she wanted;
  • Beverly Virgil Animal Hospital purchased the property next door to their current operating location to construct a bigger space that would allow them to rent out a portion of the building;
  • A Boar’s Head distributor, L.A. Deli Distributors, constructed a central refrigeration and distribution facility for their business, which allowed them more storage capacity to offer more product variety to their customers.

In addition to meeting your own unique needs as the above business owners have, you can also rent out up to 40% of your new facility, providing yourself with a passive income for years to come.

Building Acquisition

Some business owners, especially those operating in urban environments, would undoubtedly prefer to buy an existing building. This is another important use of the 504 loan. You may want to purchase  your current operating location, or relocate to a new building you’ve purchased. Business owners looking to expand their businesses to new locations may be interested in existing facilities as well. This is also a good way to provide a passive income, since when you buy an existing building, you can rent out up to 49% of it.

Improvements and Renovation

Loan funds can be used to renovate or customize the building you buy, or you can get a 504 loan to make improvements to the building you already own. Improvements covered by a 504 loan might include:

  • Physical expansion
  • Structural upgrades, such as fixing the roof or making improvements to the street or parking lot
  • Landscaping
  • Air conditioning

Equipment and Heavy Machinery

The SBA 504 loan program allows business owners to finance equipment and other fixed assets, such as fixtures, furnishings and machinery, in conjunction with purchasing real estate property. For example, manufacturers might want to purchase machinery to improve or expand production with a 504 loan. Medical professionals may need to purchase new medical or dental equipment for their practice. A gym or fitness center can purchase new fitness machines with a 504 loan. Equipment bought with a 504 loan can be new or used, but it has to be a fixed-asset with a service life of at least 10 years.

Assembly line fixtures, robotics, hotel furnishings, printing, and laundry equipment are additional examples of eligible equipment. Fishing boats and commercial vessels, as well as marine facilities, count as fixed assets too.

Energy Efficiency and Green Technology

Energy efficiency deserves particular attention, as these projects unlock additional financing opportunities. With energy efficient projects, the SBA second loan maximum is increased to $5.5 million and there is no limit to the number of projects you can finance. There are three ways to use your 504 loan for energy upgrades:

  • New projects can be built with sustainability features that represent an improvement in performance of 10% or more as compared to the previous project
  • Existing facilities can be upgraded for energy savings of 10% or more
  • You can install renewable energy generating equipment, such as solar panels on a roof or wind-power turbines

For an example of how this might apply to a small business, if you owned a car wash, you could can take advantage of the latest water-heating technology. If you were a manufacturer, you could make upgrades necessary to meet or exceed environmental standards with a 504 loan.

Fee and Expense Coverage

Soft costs—such as title and insurance fees, legal fees, architects’ fees, appraisals, environmental reports, surveys and installation charges—are an important component of any project. Luckily, they can be rolled into the 504 loan itself, reducing the out-of-pocket expenses involved in taking out the loan.

What Do You Need?

With the unique and inclusive coverage an SBA 504 loan can provide, you can more easily realize your dreams. Maybe you want to be your own boss. Or you might want to buy your premises from your landlord, or move to new facilities that provide you with room to grow. Your business is unique and a 504 loan can help you turn it into exactly what you want.

TMC Financing is a high-volume SBA Premier Certified Lender with over 35 years of experience helping borrowers with their 504 loans. You can contact one of our 504 loan experts to find out more about the best way to prepay your 504 loan.

Barbara Morrison, a local small business advocate and civic leader, founded her first company TMC Financing in 1981. TMC is a Certified Development Company that provides commercial real estate financing to small business owners via the SBA 504 Loan Program. TMC consistently ranks among the top certified development companies nationwide, and has funded projects worth more than $9 billion across California and Nevada. Nearly 5,000 small businesses have benefitted from this financing, resulting in the creation of an estimated 50,000 jobs. TMC is also the No.1 SBA 504 hotel lender in the United States. Barbara is also the founder of Working Solutions, a Bay Area microlender whose mission is to provide micro entrepreneurs, particularly low-income individuals, women and minorities, with the access to capital and resources they need to start a successful business.
Barbara Morrison