What is an SBA 504 Debenture? – Episode 167

The U.S. Small Business Administration (SBA) 504 loans or SBA 504 loans are designed to assist small businesses by offering competitive commercial loans that have low interest rates. Small businesses can use the loans to acquire commercial assets such as offices, machinery, furniture, real estate, machinery, equipment, or any type of fixed assets to operate their companies, even including construction.

In order for us to understand what an SBA 504 loan debenture is, we must first understand the fundamental structure of an SBA loan. Here’s how an SBA 504 loan works.

✅ Maximum debenture amount

While there is no maximum project size, the maximum SBA loan amount (debenture) is $5 million. Small manufacturers or specific types of energy projects may qualify for a $5.5 million debenture.

💲 Generally, a business must create or retain one job for every $65,000 guaranteed by the SBA.

💲 Small manufacturers must create or retain a ratio of one job for every $100,000.

As an alternative to job creation or retention, your business may qualify if it meets a community development or public policy goal.

✅ Debenture maximum percentage

40% of the project, subject to the limitation of the debenture amount.

✅ Borrower’s equity requirement

Minimum 10%

✅ Use of proceeds

The use of proceeds from SBA 504 Loans must be used for fixed assets (and certain soft costs), including:

The purchase of existing buildings
The purchase of land and land improvements, including grading, street improvements, utilities, parking lots and landscaping
The construction of new facilities or modernizing, renovating, or converting existing facilities
The purchase of long-term machinery or the refinancing of debt in connection with an expansion of the business through new or renovated facilities or equipment
🏁 Summary of 504 SBA Loan Benefits for Small Businesses

The SBA 504 Loan program offers small businesses both immediate and long-term benefits so business owners can focus on growing their business and cultivate bright possibilities for their future. Some of the top-level benefits include:

90% financing
Longer loan amortizations, no balloon payments
Fixed-rate interest rates
Savings that result in improved cash flow for small businesses
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