What Is the Purpose of an SBA 504 Loan?


Quick Answer

The purpose of an SBA 504 loan from the United States Small Business Administration (SBA) is for small businesses to purchase land or pre-existing buildings or to fund improvements to a business, including utilities, landscaping, parking lots and street improvements, according to the U.S. Small Business Administration. Other purposes include the construction of new facilities, renovations and conversions to existing facilities and modernization upgrades. In addition, businesses can use the SBA 504 loan proceeds to purchase equipment and long-term machinery.

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Full Answer

Proceeds from a 504 loan cannot be allotted to the use of business inventory or used for working capital, notes the SBA. Further, it cannot be used to repay, refinance or consolidate debt or to invest or speculate in rental real estate.

To qualify for a 504 loan, the business must be a for-profit company doing business or planning to do business in the U.S. or one of the U. territories, advises the SBA. The business must have a tangible net worth of less than $15 million with an average net income of $5 million or less for the 2 years leading up to the application. The business should not have funds available from other sources, including the assets of the individual owners. The business must also show the ability to repay the loan.

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