SBA 504 Loan Construction: What Owners Need to Know

SBA 504 loans are often marketed as a favorable, low-cost financing option for business owners constructing or expanding facilities. That is largely true—but only if the project is structured correctly from the start.

Unlike conventional construction financing, SBA 504 loans introduce third-party oversight, eligibility rules, and timing constraints that directly influence how your project must be planned, designed, and delivered. Many first-time owners underestimate this impact and discover the constraints only after construction is underway—when fixes are most expensive.

This article outlines what owners should expect and how to stay compliant.

What an SBA 504 Loan Is—and Is Not

An SBA 504 loan typically involves three parties:

• A private lender (usually ~50%)
• A Certified Development Company (CDC) backed by the SBA (usually ~40%)
• The owner's equity contribution (typically ~10%)

Key distinction:

The SBA does not act like a passive bank. The CDC and SBA have defined requirements for eligibility, disbursements, and documentation that must be satisfied throughout construction.

Owner-Occupancy Requirements Drive Design Decisions

Core rule:

For existing buildings, the business must occupy at least 51% of the space. For new construction, the requirement increases to 60% initially, with a path to 80% occupancy over time.

Why this matters:

• Building size and layout must support compliance
• Shell space, future tenant areas, and expansion plans must be carefully structured
• Overbuilding "for future growth" can jeopardize eligibility

Owner action:

Confirm occupancy calculations early in design and document intent clearly for the lender and CDC.

Construction Cost Eligibility Is Not Universal

Not all project costs are SBA-eligible.

Generally eligible costs include:

• Hard construction costs
• Professional design fees
• Site preparation and utilities
• Certain soft costs tied directly to construction

Often ineligible or restricted:

• Working capital
• FF&E not permanently affixed
• Tenant improvements for non-owner space
• Cost overruns outside approved scope

Owner action:

Align your project budget structure with SBA eligibility categories before loan approval—not after bids are received.

Disbursement and Draw Processes Are More Rigid

SBA 504 construction draws typically involve:

• Detailed documentation
• Third-party inspections
• Lender and CDC approval
• Strict alignment with approved budgets

Why this matters:

Cash flow disruptions are one of the most common SBA-related construction problems. Contractors still expect timely payment—even when SBA disbursement timing lags.

Owner action:

• Understand draw timing and approval steps up front
• Maintain contingency reserves outside SBA funding
• Avoid aggressive schedules that assume frictionless draws

Change Orders Receive Heightened Scrutiny

Changes are allowed—but not casually.

Key realities:

• Material scope changes may require re-approval
• Budget reallocations are limited
• Some changes may not be eligible for SBA funding at all

Owner action:

Treat change orders as both construction events and financing events. Evaluate eligibility and approval impacts before authorizing work.

Procurement and Contractor Selection Matter More

SBA-funded projects often require:

• Arm's-length contracting
• Reasonable pricing justification
• Clear scope definition

Poorly defined contracts or informal procurement processes raise red flags for lenders and inspectors.

Owner action:

Use clear RFPs, documented evaluations, and well-structured contracts. SBA projects reward discipline.

Common Owner Mistakes with SBA 504 Construction

• Designing first and asking about SBA compliance later
• Assuming SBA funds operate like conventional construction loans
• Underestimating documentation and inspection requirements
• Treating cost overruns as purely construction issues

Each of these mistakes increases delay and financial risk.

The Owner's Advantage—If Used Early

When SBA requirements are addressed during planning and design, they rarely become obstacles. When addressed during construction, they often become schedule and cost problems.

Owners who integrate financing constraints into early decision-making retain control, preserve flexibility, and avoid unpleasant surprises at the worst possible time.