What Is the SBA 504’s Equity Requirement?

As a commercial loan seeker, you should be aware of the importance of equity and the securitizing of your loan. This is not only the question of the size of the down payment; it also affects the risk level of your loan, and that in turn is reflected in the loan’s rate and other conditions. There is a lot of terminology associated with this topic, and we will look at some of the key concepts.

What Exactly Is Equity? What About Collateral?

Equity is the difference between the market value of a property and the amount of the mortgage. In other words, equity is the value of the part of the property that you own, free of mortgage. When you first secure a loan, your down payment is your equity, and that equity grows progressively as you pay down the loan.

Banks care about your equity, since it represents your financial investment in the project they are providing funds for. It shows you have, according to the familiar metaphor, your skin in the game, as the saying goes. The more you have, the more you have to lose and the more dedicated to turning a successful profit. The amount of equity you have in a business is also reflected in your business’s credit score.

Often you will not see this “equity” or “down payment” in a description of loan conditions. Instead, loan-to-value (LTV) will be indicated. This calculation tells you how much of the value of the project the loan will cover. So, if you have a $1 million project and 70% LTV, you can expect a loan for $700,000. Your down payment would be $300,000.

LTV will vary depending on the purpose of the loan and the borrower. In some cases, it may be 50% or lower, or as high as 90%. The 504 loan has an LTV rate of 85-90%.


Loan Type Loan-to-Value
SBA 504 85-90%
SBA 7(a) >85-90%
Conventional lender 70-80%
Online 70-80%
Finance company 70-75%
Construction 60-80%
Conduit (CMBS) 70-75%
Hard money 50-55%
USDA Business 60-80%

Part of preparing to secure a loan is determining the size of the down payment you want to start out with. You can minimize your debt by choosing a high down payment, or you can try to hold the down payment to a minimum if you have a need for cash.  

Collateral plays a similar role in the lending process. Collateral is property used as security for a loan. If the borrower does not maintain payments, the collateral property can be seized in a procedure known as foreclosure. In the case of a mortgage, the mortgaged property usually serves as the loan’s collateral, but it is possible that a lender will ask for additional collateral, either in the form of more property or other valuables. The right to claim a loan collateral is called a lien. There can be two liens on a property, but one will always be indicated as “first,” giving it priority.

Equity, Down Payment and the SBA 504 Loan

The 504 loan has one of the lowest down payments available on the commercial loan market. That is to say that the 504 loan starts you off with low equity and a high level of funding. Since the 504 loan has a below-market interest rate, your equity rises quickly, as a greater portion of the money from your monthly payments goes toward the principal of the loan (the amount you borrowed) than it would with a higher rate.

The 504 loan is administered by a Certified Development Company (CDC) such as TMC Financing, and loans are granted in conjunction with a conventional lender. A 504 loan has three parts:

  • The first is a loan from a conventional lender for at least 50% of the total amount. You and that lender determine the amount and conditions of that loan, which becomes your first mortgage.
  • 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 eligible for 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.

A 504 loan can be used to:

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

The 504 loan has terms of 10 and 20 years, with a 25-year term coming soon. It is fully amortized, so there are no balloon payments.

The 504 loan is a highly accessible source of financing for small business expansion. It provides a high LTV and the chance to build equity more quickly than with a conventional loan. The below-market rate makes repayment easier and the quickly rising equity is good for your credit rating.

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 35 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.


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