SBA rules · SOP 50 10 8.1
Can an SBA 504 loan be used to buy a business?
Yes, an SBA 504 loan can be used for a change of ownership, but it may only finance eligible long-term fixed assets; it cannot finance goodwill, receivables, or other business assets.
Quoted from SBA SOP 50 10 8.1Every quote checked word for word
In detail
- Eligible fixed assets only: A 504 Project, including the Third Party Loan, may finance only the costs associated with eligible long-term fixed assets, and any other assets such as receivables or goodwill must be financed by other means, which may include a 7(a) loan.
- Stock and ownership purchases: Loan proceeds cannot be used to purchase stock or any other ownership interest unless doing so purchases the real estate where the applicant is located or other eligible long-term fixed assets, and any excess value over the fixed assets must be de minimis and financed separately.
- Ownership and seller restrictions: The change of ownership must result in the applicant owning 100% of the business, and the seller cannot remain as an officer, director, stockholder, or Key Employee.
- Job creation or retention: The application must document that jobs will be created or retained because of the change of ownership, establishing a reasonable basis to conclude that retained jobs would be lost without the transaction.
- EPC buyout between existing owners: A 504 loan may finance a change of ownership between existing owners of an Eligible Passive Company (EPC) if the selling owner has held the real estate or personal property for at least 36 months, the assets are limited to long-term fixed assets leased to the Operating Company, and the transaction results in the purchasing owner owning 100% of the EPC.
The source
What the SOP says
“The 504 Project finances only the costs associated with eligible long-term fixed assets; the acquisition of any other assets such as receivables or goodwill is not an eligible use of 504 loan proceeds or Third Party Loan proceeds and must be financed by other means, which may include a 7(a) loan;
“The application documents that jobs will be created or retained because of the change of ownership. The application must demonstrate that there is a reasonable basis upon which to conclude that the retained jobs would be lost without the change of ownership.
“The 504 loan proceeds must not be used to purchase stock or any other ownership interest in a business unless, by purchasing the stock or other ownership interest, the Applicant is purchasing the real estate where the Applicant is located and/or other eligible long-term fixed assets used in the Applicant’s business operation.
“The change of ownership must result in the Applicant owning 100% of the business.
“The seller may not remain as an officer, director, stockholder or Key Employee of the business.
“An EPC may only use loan proceeds to finance a change of ownership between existing owners of the EPC when the real estate or personal property has been held by the selling owner(s) for at least 36 months.
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This page quotes the SBA's Standard Operating Procedure 50 10 8.1. Lenders can ask for more than the SBA minimum. It is general information, not a loan approval or legal advice.