SBA 504 Loans: How the 50/40/10 Structure Works, Costs and Who Qualifies

How the 50/40/10 structure works

SBA’s rule for permanent 504 financing has three parts. The small business contributes at least 10 percent of project cost. A CDC makes a loan of up to 40 percent, funded by a debenture that SBA guarantees 100 percent and that is sold to investors, and takes a second lien on the project property. A third-party lender, usually a bank or credit union, lends the balance on a first lien. The regulation also says the third-party loans must total at least as much as the 504 loan, which is why the bank piece is normally the largest.

SBA’s rules note that a project usually needs interim financing, often from the same bank, to cover the CDC’s share until the debenture is sold to investors. The debenture proceeds then repay that interim loan, including its points, fees and interest, and the permanent structure takes over. Owners therefore deal with two lenders for the life of the loan: the bank, which services its first mortgage, and the CDC, whose payments are collected monthly through SBA’s central servicing agent.

What a Certified Development Company does

CDCs are nonprofit economic development organizations certified and regulated by SBA. Each one serves a defined area, and you apply through a CDC that serves the place where the project is located. The CDC packages the 504 application, submits it to SBA (or approves it under delegated authority if it is a Premier Certified Lender), closes the second-lien loan, and services it afterwards. It also tracks the jobs your project creates or retains, because each CDC’s whole portfolio must meet SBA’s job averages.

A useful way to think about it: the bank underwrites the business and the property the way it would for any commercial mortgage, while the CDC checks SBA eligibility, size, use of proceeds, the owner contribution, occupancy and the economic development goal. Most CDCs will tell you within a short conversation whether a project fits, and many have standing relationships with banks that regularly take the first-lien piece.

What a 504 loan can and cannot pay for

SBA lists the eligible uses as the purchase or construction of buildings, the purchase of land, and long-term machinery and equipment with a remaining useful life of at least ten years. The regulation also allows professional fees essential to the project, such as appraisals, environmental studies, title and architectural costs, a construction contingency of up to 10 percent, and repayment of interim financing. Refinancing qualified debt on fixed assets is allowed under specific conditions.

What it cannot pay for is equally clear: working capital, inventory, speculation and investment in rental real estate. The business must occupy the building. For an existing building, SBA’s occupancy rule requires the borrower to occupy at least 51 percent of the rentable space and allows leasing out up to 49 percent. For new construction, the borrower must occupy at least 60 percent immediately, may lease up to 20 percent long term, and must plan to take the rest within ten years.

• Eligible: buying an owner-occupied building or land
• Eligible: ground-up construction or expansion of a facility
• Eligible: machinery with ten or more years of remaining useful life
• Eligible: soft costs directly tied to the project, and a construction contingency up to 10%
• Not eligible: working capital, inventory, investment or rental property, speculation

Job creation and public policy goals

The 504 program exists to support local economic development, so each project must meet a goal. The default is jobs. SBA’s September 30, 2025 notice set the requirement for loans approved on or after October 1, 2025 at one job created or retained per $95,000 guaranteed by SBA, or one per $150,000 for a small manufacturer or a project that meets an energy public policy goal. On a $460,000 CDC portion, that is 4.8 jobs, so about five, and retained jobs count as well as new ones.

A project that does not hit the jobs number can still qualify through a community development or public policy goal, provided the CDC’s overall portfolio meets its job average. The regulation lists, among others: revitalizing a business district under a written plan, expanding exports, expanding businesses owned by women, veterans or minority owners, rural development, modernizing to meet health, safety or environmental rules, assisting manufacturers, and reducing energy consumption by at least 10 percent.

Who qualifies: size, net worth and other tests

The business must be an operating, for-profit company located in the United States, with qualified management, a feasible plan and the ability to repay. It must also be small. Under 13 CFR 121.301, a 504 applicant can qualify in either of two ways: by meeting the size standard for its industry, measured by employees or receipts, or by the alternative test of tangible net worth no more than $20 million and average net income after federal income taxes no more than $6.5 million over the two preceding completed fiscal years, both measured with affiliates.

Pass-through entities such as S corporations and LLCs do not pay entity-level income tax, so the rule has them reduce net income by the tax a corporation would have paid before comparing it with the $6.5 million limit. SBA published a proposed rule in August 2026 that would revise many industry size standards; until a final rule takes effect, the current tables apply. SBA’s rules also allow an eligible passive company, such as a real estate entity that owns the building and leases it to the operating business, to be the borrower.

Loan limits, terms and the fixed rate

The cap applies to the CDC portion, not the whole project. The regulation limits the 504 loan to $5 million for each borrower and its affiliates, including projects that meet a public policy goal, and to $5.5 million per project for small manufacturers with all production in the United States and for projects that cut energy use by at least 10 percent or upgrade renewable energy. Because the bank piece has no SBA cap, a 504 can finance projects much larger than the CDC limit alone suggests.

The CDC portion is offered with 10, 20 or 25-year maturities, fully amortizing. Its rate is set by SBA, approved by the Secretary of the Treasury, and pegged to an increment above the current market rate for 10-year Treasury issues; it stays fixed for the full term. The bank sets its own rate and term within SBA limits. The rules require the bank loan to run at least 7 years when the 504 loan is 10 years, and at least 10 years when it is 20 years, and the bank may not include an early call feature.

What 504 fees cost

Most 504 fees are set or capped in 13 CFR 120.971 and are usually financed into the debenture rather than paid in cash. SBA describes the total as roughly 3 percent of the debt. The bank piece carries its own closing costs, and SBA also charges the bank a one-time 0.5 percent participation fee on its senior loan, which some banks pass through. Prepayment terms differ by piece, so ask both the CDC and the bank for their prepayment schedules before you sign.

Worked example: a $1.15 million building

Hypothetical. A machine shop with six years of history buys a $1,150,000 general-purpose building it will fully occupy. The owner puts in $115,000. The bank lends $575,000 on a first lien and the CDC lends $460,000 on a second lien. Assume the bank prices at 7.25 percent amortized over 25 years and the CDC piece comes in at an all-in 6.40 percent fixed for 25 years. Illustrative only, not an offer; actual 504 rates move with the 10-year Treasury.

Under those assumptions the bank payment is about $4,156 a month and the CDC payment about $3,077, for a combined $7,233. Choosing a 20-year CDC term instead raises that piece to about $3,403. The CDC portion needs about five jobs created or retained to meet the $95,000 standard. Around $13,800 of fees would typically be rolled into the debenture. If the same buyer were a 14-month-old business buying a special-purpose building, the owner would need $230,000, with the CDC share falling to $345,000.

How to apply: prepare a project file for the CDC

Start with a CDC that serves the project location; SBA's official directory is linked in the sources below. You do not have to use Nowbiz to contact one. Ask the CDC and first-lien lender for their current document checklist and an initial eligibility review before treating a purchase deadline as achievable.

Use the checklist below to organize the first discussion. It is a preparation aid, not a universal approval checklist. Ask which additional ownership, credit, property, environmental or construction records the reviewers need and where to send them securely. A funding enquiry on this page is not an SBA application or an approval.

• Project address, proposed business occupancy and purchase or construction budget
• Equipment quotes, property agreement or contractor estimates, as applicable
• Available owner contribution and cash reserved for fees, overruns and operations
• Recent business financial statements, tax returns and existing debt schedule requested by the CDC
• Ownership information, business history and a repayment forecast
• Target dates, financing contingencies and questions about interim funding

SBA 504 vs 7(a): which fits the project

Both programs can buy owner-occupied real estate, and both allow up to 25 years on real estate. The 7(a) loan is one loan from one lender, capped at $5 million, and can also cover working capital, inventory, a business acquisition, furniture and fixtures. The 504 is narrower and slower to close, but it can reach larger projects because only the CDC portion is capped, and half the debt carries a long fixed rate. In the hypothetical above, that difference is about $2,540 a month.

A 504 usually wins when the project is mostly real estate or heavy equipment, the amount is large, and a fixed rate on long-lived assets matters. A 7(a) usually wins when the purchase mixes real estate with goodwill, working capital or inventory, when one lender and one set of documents is worth more than the rate difference, or when the project cannot meet a jobs or policy goal. Some owners use both: a 504 for the building and a smaller 7(a) or a line of credit for the inventory and fit-out the 504 cannot fund.