For business owners investing in owner-occupied commercial real estate or heavy equipment, the SBA 504 Loan is one of the most widely used tools for long-term, fixed-asset financing. The SBA describes the 504 program as providing long-term, fixed-rate financing for major fixed assets that promote business growth and job creation, delivered through Certified Development Companies (CDCs) that are certified and regulated by the SBA.
Unlike general-purpose SBA loans, the SBA 504 Loan is purpose-built to fund and secure fixed assets, while helping borrowers leverage multiple capital sources (bank + CDC/SBA-backed debenture) to preserve cash for operations.
What Is an SBA 504 Loan?
An SBA 504 Loan is a fixed-asset financing program delivered through a CDC alongside a private lender often called Third Party Lenders (TPL). The SBA program page explains that 504 loans are available through CDCs (SBA’s community-based nonprofit partners) and are used for major fixed assets that support growth.
Common eligible uses (fixed assets)
SBA 504 financing is typically used to fund:
- Owner-occupied commercial real estate (purchase, construction, renovation)
- Machinery and equipment with a long useful life
- Other qualifying fixed assets tied to business operations
Funds: How SBA 504 Loans Fund Real Estate and Equipment
Most SBA 504 projects are structured as a three-party financing stack:
- Private lender (often a bank) — typically ~50% (first lien)
- CDC — up to ~40% via a debenture backed by an SBA guaranty
- Borrower — typically at least 10% as a down payment
The OCC describes the 504 program typical model: bank loan around 50% in first lien position, CDC loan up to 40% in second lien position, and borrower contribution of at least 10%. It also explains the CDC portion is backed by a 100% SBA-guaranteed debenture.
Why this matters for borrowers
This structure can help borrowers leverage financing (instead of tying up large amounts of cash) to acquire higher-value assets while keeping more liquidity available for operations.
Secures: How the SBA 504 Structure Secures Long-Term Financing
The SBA 504 model secures financing through:
- A first lien for the bank portion
- A second lien for the CDC portion (debenture backed by SBA guaranty)
This lien structure is a major reason SBA 504 can work for long-term fixed assets: it aligns lender security with the asset being financed and supports longer amortization profiles than many conventional options.
Allocates: How SBA and CDCs Allocate Capital for Economic Development
The SBA describes CDCs as community-based nonprofit partners that promote economic development within their communities and notes they are certified and regulated by SBA.
In practice, CDC participation is designed to help allocate capital toward projects that:
- Expand productive capacity (facilities, equipment, modernization)
- Support job creation and local growth goals
Leverage: Owner-Occupancy Rules and Borrower Contribution Requirements
Owner-occupancy requirements (real estate)
SBA 504 real estate is intended for owner-occupied facilities, not passive investment property. SBA’s own eligibility documentation (Form 2234C) includes occupancy standards such as:
- 51% occupancy for an existing building purchase/renovation
- For new construction, the business must occupy more than 60% within 3 years and plan to occupy at least 80% within 10 years
Down payment (borrower contribution) rules: 10% / 15% / 20%
A Congressional Research Service (CRS) report explains the standard borrower contribution framework:
- At least 10% for standard 504 loans
- At least 15% if the borrower is a new business or if the project involves a limited-market/special purpose property
- At least 20% if the borrower is a new business and the property is limited-market/special purpose
These contribution rules directly affect how much borrowers can leverage the program and how the 50/40 stack may adjust in higher-risk scenarios.
Why Businesses Use SBA 504 Loans for Fixed Assets
SBA 504 is often a strong fit for borrowers who want to:
- Purchase or renovate owner-occupied commercial real estate
- Acquire expensive machinery or equipment with long useful life
- Keep payments predictable with long-term financing
- Preserve working capital by leveraging a lower down payment structure (often 10%, subject to project type)
Important nuance on rates: the CDC debenture portion is commonly structured as long-term, fixed-rate financing, while the bank portion’s rate/term is negotiated with the lender.
Can you create a real estate holding company with SBA 504 Loans separate of the operating company? (OC vs. EPC)
Yes, you can separate the real estate from the operating business in an SBA 504 project if you structure it correctly using an Operating Company (OC) and an Eligible Passive Company (EPC).
This is a recognized SBA structure that allows a “passive” real estate entity to own the building while the operating business occupies it, as long as the arrangement meets SBA eligibility rules.
How the OC / EPC structure works
1) The EPC holds title to the real estate
- The EPC (often a separate LLC) is the real estate holding company that owns the property.
- The OC is the operating company that runs the business and uses the space.
SBA 504 application materials explicitly contemplate co-applicants such as an EPC and an OC in a 504 transaction.
2) The OC must meet SBA owner-occupancy rules (through its lease)
SBA 504 real estate must be owner-occupied (i.e., used by the operating business), not primarily investment real estate. SBA eligibility materials include owner-occupancy standards such as:
- 51% occupancy for an existing building purchase/renovation, and
- 60% occupancy for new construction (with longer-term ramp-up targets).
3) The EPC must be “passive” and limited in purpose
The EPC typically must be limited to holding the real estate (and related fixed assets) and leasing it to the OC—not operating unrelated businesses or acquiring properties for passive investment.
SBA eligibility documents flag passive landlord/developer structures as ineligible unless they qualify under the SBA’s EPC rules.
4) The EPC–OC lease must satisfy SBA requirements
SBA regulations governing EPC structures require that the lease:
- be in writing,
- be subordinate to SBA’s lien, and
- include an assignment of rents from the EPC as part of the collateral package.
What you generally cannot do with SBA 504 (even with a holding company)
You generally cannot use SBA 504 financing to create a separate real estate company that:
- buys property primarily to rent to unrelated tenants, or
- operates like a standalone landlord/investment real estate business detached from the OC’s occupancy and use.
How SBARates.com Helps You Compare SBA 504 Options
Because SBA 504 projects involve both a private lender and a CDC, shopping smart matters. SBARates.com is relevant here as a research hub to help borrowers identify and compare active SBA lenders, so you can shortlist banks/credit unions/non-bank lenders that actually do 504 deals in your region and asset category, then coordinate with a CDC partner.
A practical workflow:
- Confirm your project fits 504 use-of-proceeds and occupancy rules
- Use SBARates.com to shortlist active lenders for 504-type transactions
- Compare bank terms (rate/term/fees) and CDC timelines as a single project plan