SBA 504 or a conventional bank loan to buy your business's building

How a 504 deal is built

A 504 project has three pieces. A bank makes a first mortgage for half the cost. A certified development company (CDC) makes a second loan funded by a debenture, backed by an SBA guarantee, that is sold to investors each month. The business puts in the rest. New businesses and special-purpose buildings put in more: 50% bank, 35% CDC, 15% borrower¹, or 50% bank, 30% CDC, 20% borrower when both apply.

The debenture’s rate is set at the monthly sale, benchmarked to Treasuries: The 20- and 25-year debenture rates are most commonly benchmarked to the 10-year Treasury; the 10-year debenture to the 5-year Treasury¹. October 2026’s 25-year debenture priced at 5.85% before fees. CDCs publish an effective rate that adds the ongoing fees, and each CDC computes its own, so quote the CDC you will use.

SBA also protects the bank piece: Bank first lien: at least 10 years when paired with a 20- or 25-year 504 (7 years with a 10-year 504)¹.

A $3 million building: 504 against a conventional loan

Illustration. A business buys a $3,000,000 building it will fully occupy. Assume the bank charges an illustrative 6.75% on a 25-year schedule for both its 504 first lien and a conventional loan; in practice a 504 first lien at half of value often prices a little better. Use SomerCor’s published 25-year effective rate for the 504 second lien. The conventional bank loan lends 75% of value.

Financing (illustration)	SBA 504	Conventional bank loan
Bank first lien	$1,500,000 at 6.75%	$2,250,000 at 6.75%
CDC debenture	$1,200,000 at 6.97%	none
Cash down	$300,000	$750,000
Annual payments	about $124,400 bank + $101,500 CDC = $225,900	about $186,500
Balloon	Bank piece may balloon; debenture fully amortizes	Usually a balloon well before year 25

The 504 keeps $450,000 more cash in the business. In exchange, the business carries about $39,300 a year more in payments because it borrows $450,000 more. For most operating businesses, $450,000 of working capital is worth more than that, which is why 504 is the default for owner-users who qualify.

Exit in year three. The 504 debenture’s premium is a share of the coupon: 504 premium = remaining debenture balance x debenture rate x the year's factor⁴. With a debenture balance of about $1,162,000, the October 2026 debenture rate and a year-three factor of 0.80 from SBA’s table (Factor P by year: 1.00, 0.90, 0.80, 0.70, 0.60, 0.50, 0.40, 0.30, 0.20, 0.10, then 0 from year 11), the premium is about $54,400. The conventional bank loan might carry a step-down, often less.

Fees to count

Fee (SBA 504)	Amount
SBA upfront fee on the debenture	0.50%5
SBA annual fee (in the effective rate)	0.203% per year5
CDC processing	Up to 1.5% of the net debenture1
CDC servicing (in the effective rate)	0.625% to 1% per year in most areas (up to 1.5% rural, 2% with SBA approval)1
Closing costs financed	Up to $10,000 financed from debenture proceeds1
Funding fee	0.25%1
Underwriter fee	0.40% on 20- and 25-year debentures, 0.375% on 10-year1
Bank first lien participation fee	0.50% of the bank loan, one time1

Most of these are financed in the debenture, so they raise the balance rather than the cash at closing. A conventional bank loan has its own origination fee, appraisal and legal, and no SBA fees.

What each lender checks

SBA 504 (bank and CDC): business cash flow and the coverage SBA requires (1.15x¹), owner occupancy, eligibility under SBA’s size standards (one alternative test is $20 million net worth or less with $6.5 million average net income or less), citizenship, personal guarantees from owners, and the job ratio: One job per $95,000 of SBA-guaranteed debenture¹.

Conventional bank: business and personal tax returns, coverage, the appraisal, the guarantor, and the deposit relationship. Banks like owner-occupied loans. They sit outside the supervisory concentration screen: Loans on owner-occupied commercial property do not count toward the 300% CRE screen⁶. They also perform better, at 0.91% of bank owner-occupied commercial property loans noncurrent⁷ against 1.42% of bank non-owner-occupied commercial property loans noncurrent⁷.

Where each one wins

504 wins when cash matters, the business will occupy the building for a long time, and a fixed rate on part of the debt is worth the extra process. It also fits special-purpose buildings investor lenders avoid.

The conventional bank loan wins when the owners can put more down, want one lender and a quicker closing, may sell within a few years, or include an owner who is not eligible under SBA’s citizenship rule.

The costs people miss

• The interim loan. The debenture funds at a monthly sale after closing, so the bank usually makes an interim loan for the CDC’s share until then.
• The bank first lien’s term. It may balloon long before the debenture matures, so the business still has a refinance to plan.
• Occupancy over time. If the business shrinks below SBA’s occupancy share, read the loan documents before leasing out space.
• Personal guarantees on both routes.

Owner-occupied deals are one part of what we arrange. Send the purchase price, the business’s financials and occupancy plan, and we will price 504 against a conventional loan.