What Is the Minimum Credit Score for a 504 Loan?

While having a good credit score is important to all business owners, there is no minimum credit score required to receive a Small Business Administration (SBA)  504 loan. This is a common source of confusion because the topic is often discussed in publications and on social media and lenders’ websites. An assortment of numbers may be bandied about in those places, but none of them should discourage you from applying.

The Difference Between Personal and Business Credit Scores

Like personal credit scores, business credit scores are compiled by competing private companies. There are more differences than similarities between the two types of score though. The algorithms used to determine your business credit score, while proprietary to the companies using them, are known to be much more varied than those used for personal credit scores. The companies (Experian and Equifax, which also compile personal credit sores, and Dun & Bradstreet) also apply different standards to different lines of business.

Unlike your personal credit score, you business score is available publicly (for a price). Your business credit score has a profound impact on your financial potential, so you should work on establishing your business credit score and, if necessary, repairing it

Why Your Credit Score Is Important for a 504 Loan

Even though there is no minimum score for a 504 loan, your Certified Development Company (CDC) will be interested in your business credit score during the loan pre-qualification process.  for the loan. If your credit score is not strong, you should speak openly with your CDC loan officer about it.  It would be a good idea to talk about what you have done to remedy the problem and what steps you are continuing to take.

A 504 loan has three parts, one of which is a loan from a conventional lender (such as a bank or credit union) for at least 50% of the total project cost. A lower credit score might diminish your chances of receiving a commercial loan from a bank. However, lenders who participate in the 504 loan program get an extra incentive in the form of the first lien position in the loan. This significantly decreases the bank’s risk, and makes it more likely they will lend to you.

A borrower with lower credit score may want to find a bank that works with a large volume of 504 loans. The top SBA lenders make hundreds of loans a year and have experience with all kinds of lending situations. Also, if you do not have a lender picked out, you can ask your CDC to help you select one. TMC Financing is happy to help match a borrower with the right bank for their small business expansion project. You can also explore the option of business credit companies who can help build and improve your credit score. These companies often provide services such as credit monitoring, consulting, and assistance in obtaining loans.

Why 504 Loans Are Great Options

The 504 loan was designed to increase small business prosperity through accessible financing, which is why they do not have a minimum credit score. Most businesses are eligible for a 504 loan. Eligibility requirements are:

  • The business must be for-profit
  • The business’s tangible net worth cannot exceed $15 million
  • The business’s after-tax profit for the last two years cannot exceed $5 million

A 504 loan can be used to:

  • purchase land or buildings
  • construct buildings
  • purchase equipment with a service life of ten years or more
  • improve, upgrade or renovate buildings
  • refinance conventional debt

As mentioned, a 504 loan has three components:

  • A loan from a conventional lender for at least 50% of the total amount.
  • Your CDC facilitates a separate SBA loan of 40% of the total, up to $5 million, at a fixed, below-market rate. You can receive up to $5.5 million for manufacturing projects or projects that participate in the SBA’s Green Energy Program. This is your second mortgage.
  • Then you, the borrower, contribute 10% to the loan as down payment. Certain types of facilities are classified as single-purpose properties by the SBA and require a 15% down payment.

The 504 has a 10-year or 20-year term (with a 25-year option coming soon), and it is fully amortized, so there are no balloon payments.

The 504 loan provides accessible, affordable financing to small businesses that might otherwise have trouble obtaining credit. The CDC that administers the loan will be an advocate for your business through the life of the loan. It is an important option to keep in mind when you are looking for a commercial loan.

You can find out more about the 504 loan from one of TMC Financing’s 504 loan experts. TMC is an SBA Premier Certified Lender and a high-volume loan provider. With over 40 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.