SBA 504 Loan Program: 50-40-10 Split, Terms, and Eligibility

The SBA 504 loan program is long-term, fixed-rate financing for major fixed assets — commercial real estate, construction, and heavy equipment — delivered through a three-way split: a private bank funds 50% of the project, a nonprofit Certified Development Company (CDC) funds up to 40% through an SBA-guaranteed debenture, and you put down 10%. The SBA-backed portion is capped at $5.5 million per project.¹ Below-market fixed rates and a smaller down payment than a conventional commercial loan are the trade-off for stricter eligibility rules and a slower closing.

How the 50-40-10 Split Works

Every 504 project is funded from three sources. A commercial bank (the Third Party Lender) covers 50% of the total cost and takes the first lien on the assets. A CDC funds up to 40% through an SBA-guaranteed debenture and takes second lien. You contribute the remaining 10% as an equity injection.¹

Your 10% floor rises in three situations. A startup with less than two years of operating history puts down 15%. A special-purpose building — think car wash, bowling alley, or any structure that can’t easily be repurposed — also carries a 15% minimum. If both apply, or if you already have a 504 debenture on one special-purpose property and are financing another, the equity requirement climbs to 20%. The rule is straightforward: less track record or more specialized collateral means more of your own money in the deal.

The structure is what makes the program work. Because the bank sits at 50% loan-to-cost in first position, its risk is lower than on a conventional deal at 80% or 90%, and its pricing usually reflects that. You get in for far less down than a typical commercial loan would require.

What You Can Use the Money For

The 504 program pays for fixed assets and the costs tied to acquiring them. Eligible uses include buying land, purchasing an existing building, constructing a new facility, making substantial improvements (utilities, parking, build-outs), and acquiring long-lived machinery or equipment. Professional fees connected to the project — appraisals, architectural work, environmental studies, legal fees for zoning or permits — also qualify, and construction projects can include a contingency reserve of up to 10% for cost overruns.²

Working capital and inventory are not eligible. You cannot use 504 proceeds for payroll, to stock shelves, or to fund day-to-day operations. If you need operating cash, that’s a different SBA product.

Loan Size, Terms, and Interest Rates

The SBA-backed debenture caps at $5.5 million for most projects.¹ Because that debenture is 40% of project cost, a maxed-out debenture supports a project of roughly $13.75 million. The bank’s 50% share and your 10% equity are separate from that cap, though the bank sets its own underwriting limits.

Repayment terms run 10, 20, or 25 years. The 10-year term is typically used for equipment; 20- and 25-year terms apply to real estate.¹ All three fully amortize. No balloon payment.

The debenture’s interest rate is fixed for the full term and set at an increment above the current market rate for 10-year U.S. Treasury bonds.¹ Your rate is not locked at application. It locks on the monthly debenture pricing date, usually the first Thursday of the first full week of the month. The 20- and 25-year debentures price monthly; 10-year debentures sell on a less frequent cycle. The SBA publishes an annual funding schedule so you and your CDC can plan around it.

Fees and the Prepayment Penalty

Upfront fees on the debenture generally total around 3% and can be financed into the loan rather than paid out of pocket.¹ They include an SBA guarantee fee, a CDC processing fee, and closing costs such as title insurance and legal fees. Ongoing servicing fees are built into the monthly payment. The bank’s 50% portion carries its own separate fees, which vary by lender.

The prepayment penalty is where borrowers most often get caught off guard. On a 20- or 25-year debenture the penalty lasts a full 10 years. Year one equals the debenture interest rate applied to the outstanding balance, and it declines by roughly 10% each year until it disappears in year eleven. A 10-year debenture carries a shorter five-year penalty window. The penalty is not negotiable. It’s baked into the debenture sale to bond investors, who bought a fixed-income security and are protected against early payoff.

Who Qualifies

Your business must be for-profit, physically located in the United States, and “small” under SBA standards.³ “Small” has two paths, and you only need to pass one. Either you meet the size standard for your industry (based on employees or revenue), or you meet the alternative test: tangible net worth under $15 million and average net income under $5 million after federal taxes over the last two fiscal years, counting affiliates.⁴

Projects also have to serve a public interest, usually through jobs. The current rule requires one job created or retained for every $95,000 of SBA-guaranteed funds, or every $150,000 for small manufacturers and energy-focused projects. Those figures apply to loans approved on or after October 1, 2025.⁵ A project that doesn’t create jobs directly can still qualify by meeting a public policy goal such as improving energy efficiency, expanding exports, supporting rural development, or operating in a designated enterprise zone. When that path is used, the CDC’s overall portfolio still has to hit the job-creation average.

Personal Guarantees

Anyone owning 20% or more of the business will generally have to sign a full personal guarantee. The SBA can require guarantees from others involved in the business but will not require one from anyone holding less than 5%.⁶ This is not negotiable, and it surprises owners who structured the business specifically to avoid personal liability.

Ineligible Businesses

Some categories are excluded outright, regardless of size or financials:

Nonprofits (though for-profit subsidiaries can qualify)
Financial businesses primarily engaged in lending, such as banks and finance companies
Passive real estate holdings where the owner won’t occupy the property
Businesses deriving more than a third of revenue from gambling
Speculative ventures like oil wildcatting
Businesses with principals under felony indictment or with convictions involving financial misconduct
Businesses that previously defaulted on a federal loan and caused the government a loss

Life insurance companies, businesses engaged in illegal activity, pyramid sales operations, and businesses primarily involved in political lobbying are also excluded.⁷

Applying for a 504 Loan

You apply through a CDC, not directly through the SBA. The CDC handles intake, underwrites the deal, and assembles the package. The SBA maintains a directory of CDCs, and most banks that participate in 504 lending already have CDC relationships in place.

The main form is SBA Form 1244, which covers both the borrower’s information and the CDC’s project analysis.⁸ Plan on providing:

Business balance sheets and profit-and-loss statements for the last three fiscal years
Federal tax returns, business and personal, for all principal owners
A business plan showing company history, current operations, and how the project supports growth
SBA Form 413, a personal financial statement, from every owner holding 20% or more⁹
SBA Form 912, a personal history statement used to run background checks, including FBI criminal history queries when warranted¹⁰

Environmental Review on Real Estate

Real estate projects trigger environmental due diligence. Any property tied to an environmentally sensitive industry — gas stations, auto repair shops, dry cleaners, commercial fueling operations, or sites with known prior contamination — requires a Phase I Environmental Site Assessment before approval, with an SBA reliance letter. If Phase I flags concerns, a Phase II follows. Properties outside those industries may still need some level of review based on site history. Your CDC will tell you which level applies early on, and the cost counts as an eligible project expense.

Closing and Funding

Closing runs on a different rhythm than a conventional loan. The bank’s 50% portion usually funds first, often through interim or bridge financing that keeps the project moving while the debenture works through the secondary market. The CDC coordinates the legal paperwork and the eventual sale of the debenture to bond investors, and that sale is what locks in your permanent fixed rate. Depending on where your project lands in the monthly funding cycle, expect a gap of several weeks between SBA authorization and final debenture funding.

1
U.S. Small Business Administration. 504 Loans
2
eCFR. 13 CFR 120.882 – Eligible Project Costs for 504 Loans
3
eCFR. 13 CFR 120.100 – What are the eligibility requirements for SBA business loans
4
Federal Register. Small Business Size Standards – Adjustment of Alternative Size Standard for SBA 7a and CDC 504 Loan Programs
5
Federal Register. Development Company Loan Program – Job Creation and Retention Requirements
6
GovInfo. 13 CFR 120.160 – Loan Conditions
7
eCFR. 13 CFR 120.110 – What Businesses Are Ineligible for SBA Business Loans
8
U.S. Small Business Administration. Application for Section 504 Loans
9
U.S. Small Business Administration. Personal Financial Statement
10
Reginfo.gov. Supporting Statement for Requests for OMB Approval – SBA Form 912