504 loans could help your business customers. Here’s how

Inside the barrel room

Grant Pauly, owner of 3 Sheeps Brewing Co., is a loan customer of Mark C. Maurer at Investors Community Bank.

While not the most popular SBA loan program, 504 loans may offer an attractive financing option for both new and seasoned small business customers. They’re another tool in community banks’ toolbox for fostering small businesses’ success, at a time when they need support more than ever.

By Beth Mattson-Teig


The Small Business Administration’s 504 Loan Program is often overshadowed by its 7(a) counterpart. Certainly, it’s a fraction of the size of that program, generating about $5 billion in commitments in fiscal 2019, compared with $23.2 billion in financing for 7(a) loans. Yet, 504 loans can be an important part of the toolbox of products that community banks offer business customers.

Banks use 504 loans specifically to finance fixed assets. One big selling point for borrowers is the ability to secure a long-term, fixed-rate loan with terms of 20 or 25 years for acquisition, construction or improvements to existing facilities, as well as 10-year loans on business equipment. Additionally, borrowers can put down as little as 10% versus the usual 20–25% requirement of a conventional loan.

In 2019, $1.1 billion-asset Oak Valley Community Bank in Oakdale, Calif., funded about $26 million in 504 loans. The bank sees them as an attractive option for good customers who may not have the equity for an expansion or a new property but can manage the 10% down payment. “So, it provides them an opportunity to grow and provides us the commitment and relationship that we retain with the customer,” says Mike Rodrigues, executive vice president and chief credit officer.

Many bankers view the 504 loans as another avenue to create or strengthen business relationships and cross-sell other products. Funding a 504 loan may open the door to servicing business needs related to deposits, lines of credit or other conventional loan products. “Normally, when we are using the 504 program, this is just one piece of the full relationship,” Rodrigues says.

Quick stat

$5 billion

in financing was supported by the SBA’s 504 Loan program in FY 2019

Source: Small Business Administration

In Wayzata, Minn., $250 million-asset Flagship Bank Minnesota is working to ramp up its SBA lending on both the 504 and 7(a) sides, as the loans are a good fit for the bank’s focus on commercial customers. Unlike 7(a) loans, which tend to be transitional financing for startups, 504 applicants run the gamut from new to established businesses.

“It’s a great program because it does help out the very new small companies,” says Flagship Bank president Brian Wagner, “as well as some of the established employers in a local community that are looking to expand.”

Banks lean on CDC partners

Many community bankers view 504 loans as much more approachable and less complicated than 7(a) loans.

“Sometimes people are reluctant to go down the path of an SBA 504, because they think it is a government program and there will be a lot of work involved and more fees,” Wagner says, “but it is really not that difficult of a program for a borrower to pursue, assuming they fit the requirements.” Key qualifiers for borrowers include:

  • a for-profit company with net worth of less than $15 million and annual net income of less than $5 million
  • a loan amount that doesn’t exceed $5 million
  • a business that occupies at least 51% of the property being financed

Another key difference with the 504 program is that banks work in partnership with Certified Development Companies (CDCs), nonprofit entities regulated by the SBA that reduce banks’ financial risk. The bank funds 90% right away and is then paid off by the SBA on the 40% from the CDC once the SBA debenture funds. The bank ends up with a 50% or less first lien position and the SBA ends up with a second mortgage equal up to 40% of the project. The CDCs play a big role in helping the borrower through the application, underwriting and approval process.

The approach that Flagship Bank takes is to set up an initial meeting between the borrower, the bank and the CDC to address any questions, confirm the borrower’s qualifications and establish next steps. The banker may provide a hands-on role in helping to obtain information from the borrower. In other cases, the borrower may work directly with the CDC. “The CDC is willing to take your lead, but they really make the process easy, because they know exactly what the SBA is going to need,” Wagner says.

Although banks can rely on the expertise of CDCs, many choose to work in tandem to get loans across the finish line. “It really needs to be synchronized, and we all need to be on the same page,” says Mark C. Maurer, vice president and senior business banking officer at $1.4 billion-asset Investors Community Bank in Manitowoc, Wis., which has about 30 active 504 loans.

“It’s a win-win for both the bank and the borrower,” says Bill Hodgkiss, senior vice president and head of business banking at Investors Community Bank. “We don’t have to fund as much of the loan, and we get to push off some of the rate risk. For the customer, they get a nice long, low rate and they don’t have to put as much capital into the deal.”

“It’s a win-win for both the bank and the borrower.”
—Bill Hodgkiss, Investors Community Bank

At $34 billion-asset Frost Bank in San Antonio, 504 loans are a small part of overall loan production, but the program remains an important part of its overall small business offerings.

“At Frost, we are trying to build relationships,” says Rebecka Holt, senior vice president and director of central credit and business banking. “Sometimes, those 504 loans are a steppingstone into the bank or into their first project.”


Beth Mattson-Teig is a writer in Minnesota.

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