Plenty of good shops never own the four walls around their spindles. They sign a five-year lease, put money into power drops, foundations and air lines, and then hope the renewal number is something they can live with. Big machines often get the same treatment. Each one comes on its own equipment loan or lease, with a separate term and a separate payment.

There is another way to finance both, and a lot of owners have never looked at it closely. The SBA 504 loan was designed for long-lived fixed assets, the kind a shop will use for years.

Why buildings and big machines fit 504

According to SBA, the 504 program finances major fixed assets. Eligible uses include buying, building or renovating land and buildings, and buying long-term machinery and equipment with a remaining useful life of at least 10 years. Certain debt refinancing is also allowed under SBA’s rules. Working capital, inventory and investment real estate you plan to rent out are not eligible.

The building you run the shop from qualifies. So does a horizontal machining center, a multi-axis turning center, a large press, or a heavy crane system that will be in service for a decade or more.

If you are buying or building a facility, a 504 can put the building and the qualifying equipment into one financing package. That is cleaner than stacking a mortgage on top of several separate equipment notes.

How the structure works

A 504 loan usually has three pieces:

• A bank or credit union first loan, typically about 50 percent of the project cost, secured by a first lien.
• A Certified Development Company (CDC) loan, typically up to 40 percent, backed by an SBA-guaranteed debenture and secured by a second lien. CDCs are nonprofit economic development organizations that SBA certifies and regulates.
• The owner’s contribution, typically 10 percent.

  That 10 percent can rise. If the business has been operating for less than two years, or the project involves a limited-purpose or special-purpose property, the owner generally needs to put up 15 percent. If both are true, it may be 20 percent.

  According to SBA, the CDC portion carries a fixed rate pegged to an increment above the current market rate for 10-year U.S. Treasury issues. Terms are 10, 20 or 25 years. Real estate usually goes on the longer terms and equipment on the shorter one. Total fees on the SBA portion run roughly 3 percent of that debt and can be financed into the loan. The bank sets the terms on its own portion. Rates move with the market and depend on the deal, so ask any lender and CDC for current quotes in writing.

  Advantages for manufacturers

  Small manufacturers get a higher ceiling than most 504 borrowers. SBA’s guaranteed debenture is generally capped at $5 million, but a small manufacturer can go up to $5.5 million. SBA defines a small manufacturer as a small business whose primary NAICS code falls in Sectors 31 through 33, with all production facilities located in the United States.

  Most 504 projects also have to meet an economic development objective. The most common one is creating or keeping jobs. Under current SBA rules, for loans approved on or after October 1, 2025, a typical project must create or retain one job for every $95,000 of SBA-guaranteed debenture. For a small manufacturer, that ratio is one job for every $150,000. A shop with a $1.5 million SBA portion would need to show 10 jobs created or retained, not about 16. Public policy and community development goals offer other ways to qualify.

  Eligibility basics

  The business must be an operating, for-profit company located in the U.S., and it must be small under SBA’s size rules. There are two ways to qualify. One is the industry size standard for your NAICS code, which for most manufacturers is based on employee count. The other is SBA’s alternative size standard. Tangible net worth can be no more than $20 million, and average net income after federal taxes, excluding carry-over losses, can be no more than $6.5 million over the two full fiscal years before you apply. Affiliates count toward both tests.

  The business also has to occupy the building. For an existing building, it must occupy at least 51 percent of the space. For new construction, the requirement is higher, generally 60 percent at the start, with a plan to occupy more over time. Some owners hold the building in a separate real estate company and lease it to the operating company. Lenders see that structure often, and it can work, but they will usually want both entities and their owners involved.

  What lenders ask for, and a realistic timeline

  Most lenders and CDCs will want a complete file. That usually includes:

  • Three years of business tax returns and financial statements, plus a current interim statement
  • Personal financial statements and tax returns for each owner of 20 percent or more, who will generally be asked to guarantee the loan
  • A debt schedule and an accounts receivable and payable aging
  • The purchase contract or construction budget, and equipment quotes with model numbers and expected useful life
  • Projections, especially if the move or new machines will change revenue and headcount

  Expect an appraisal and an environmental review on the property. For shops, that review is not a formality. Older industrial buildings may have solvents, cutting fluids or underground tanks that have to be checked before closing.

  Approvals vary by lender and CDC. A complete file moves faster. Closing commonly takes 60 to 90 days for an existing building, and longer if you are building. The CDC portion is funded after the project is finished, so the bank often provides interim financing in the meantime. If a lease is expiring, start early.

  Weigh it against a conventional loan

  A 504 is not the right loan for every shop. The paperwork is heavier than a standard equipment note. Closing takes longer. Approval always depends on the lender’s and CDC’s review of your credit, cash flow and the project itself. Nothing about the program guarantees financing.

  For an established shop with steady cash flow and a lease that keeps going up, especially if you plan to add capacity, sit down with your bank and a local CDC. Ask them to compare a 504 against a conventional loan on the same project.

  John Berardino writes about small business real estate and equipment financing for SBA 504 Loan Hub (sba504loanhub.com), an independent educational resource on the SBA 504 program. SBA 504 Loan Hub is not affiliated with the U.S. Small Business Administration.