Understanding the SBA 504 Loan Structure

The SBA 504 loan can be confusing at first glance because it’s structured differently than conventional commercial real estate loans. There’s a reason for that, and it’s very beneficial for small business owners. A typical 504 project has a 50-40-10 structure. There’s a first mortgage that covers up to 50% of the total project cost, a second mortgage for 40% of the total project cost, and then 10% equity from the borrower (down payment). This structure makes it possible for small business owners to own commercial real estate with less money down and get longer-term fixed interest rates than conventional financing methods allow.

SBA 504 Loan Structure

SBA 504 Loan Structure Example:

1st Mortgage/Third Party Lender (or Mercantile in certain situations) $1,000,000
2nd Mortgage/SBA Portion $800,000
Equity $200,000
Total Project Cost $2,000,000

50% of the Total Project Cost

Conventional Loan at Market Rates

  • Up to 25-year amortization.
  • No balloons, calls or covenants.
  • Option of fixed or variable interest rate.
  • Assumable loan.

40% of the Total Project Cost

Below Market, Fixed Rate Bond with an SBA Guarantee

  • 20 year amortization.
  • No balloons, calls or covenants.
  • Fixed interest rate at below market rate, fixed for the entire 20 Years.
  • Assumable loan.

10% Total Project Cost

Equity Injection/Down Payment

  • Cash
  • Can use equity in land if already purchased.
  • Can use prepaid soft costs, like architectural or engineering fees.
  • Assumable loan.

*  15% equity requirement on special use properties or start-up businesses; 20% for special use properties and start-up businesses.

The Bottom Line: The SBA 504 loan preserves capital and maximizes cash flow for small business owners. It really is the smart choice for small business owners who want to own their commercial real estate.

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