SBA 504 Loan Program: Dangers

The SBA 504 Loan program provides loans to small businesses to purchase property, buildings, and/or equipment. This loan program can provide up to $4 million in some cases, and can be very helpful, but is not without some disadvantages to the borrower.

The loan program requires a very detailed application, which will very between commercial lenders at times. Standards have been created by the SBA, which are used with some modifications by lenders. The SBA requires a partnership for the 504 loan between a lender and a CDC organization. The private lender is responsible for 50% of the loan, the CDC provides 40%, with the business owner putting down 10%.

Disadvantages of the SBA 504 Loan

There are few points that will prove the 504 loan has its disadvantages over a traditional loan.

  • Depending on the lender, it can take significantly longer for the process to determine if approved. While some lenders promote decisions in 45-60 days, some can take 6 to 12 months to decide. Many business owners simply do not have this time to wait.
  • While the SBA has set up a maximum interest rate chargeable by lenders, it does not imply that all lenders charge the same interest. This is a very important point to note, as some lenders will charge slightly higher rates for SBA 504 loans than they do for traditional loans.
  • The immense detailed requirements that are needed for an SBA 504 loan are sometimes more than a traditional loan. This is another point worth researching, as creating a detailed application takes a lot of time and effort. The CDC has created a checklist of what is needed for consideration, which may be above and beyond what is needed for a small business loan from other sources.


Research the Pitfalls

It is advantageous for any borrower to research and compare options prior to committing the time and sometimes money to create a detailed package of loan applications. In the long run, it may be better to apply for a traditional loan if the interest and timing are better.


The SBA 504 loan program is designed to give out more money over a longer period of time, thus benefiting the business owner by freeing up more cash. The dangers involved with collateral are that the bank and CDC can take back the property or equipment purchased if the loan goes into default, leaving the borrower with nothing.


The SBA 504 loan program has its definite advantages to some borrowers, but do not presume that all commercial loans are created equal. Private lenders may consider the venture a less risky one than what the SBA sees, and be just as willing to lend the money.