Buying an existing business can be a faster path to ownership than starting from scratch. You get customers, staff, systems, and cash flow from day one. But an acquisition usually comes with a big price tag, and the way you finance it can shape your monthly payments for years.
If the business you’re buying owns its building or relies on major equipment, an SBA 504 loan may be part of the answer. Here’s how it works and where it fits.
What You’re Actually Paying For
When you buy a business, the purchase price usually covers several different kinds of assets:
- Real estate, if the business owns the building or land it operates from
- Equipment and machinery
- Inventory
- Goodwill, which is the value of the brand, customer relationships, and reputation
- Working capital to keep the business running through the transition
Different loan programs are built to finance different pieces of that list. Understanding the breakdown is the first step to finding the right structure.
Where the SBA 504 Loan Fits
The SBA 504 loan is designed for long-term, fixed assets. In an acquisition, that usually means:
- The building the business operates from
- Land
- Long-life equipment and machinery
If those assets are a large part of the deal, 504 financing can offer a low down payment and a long-term fixed rate on the SBA portion. See how the program works on our 504 loan program page and our purchase page.
What a 504 Loan Doesn’t Cover
A 504 loan can’t be used for goodwill, inventory, or working capital. For most acquisitions, that means the 504 loan covers the hard assets while another loan covers the rest.
Pairing a 504 With a 7(a) Loan
Many business buyers use two SBA programs together:
- SBA 504 for the real estate and major equipment
- SBA 7(a) for goodwill, inventory, and working capital
This approach can give you long-term fixed financing on the assets that last the longest, with flexible financing for the rest. Our guide to SBA 504 vs. SBA 7(a) explains how the two programs compare.
How a 504 Is Structured
A typical 504 project is split three ways:
- About 50% from a bank or credit union, secured by a first lien
- Up to 40% from a Certified Development Company (CDC) like Intermountain Business Lending, backed by the SBA
- As little as 10% from the borrower
Some projects require a larger down payment, such as a new business or a special-purpose property. Our post on SBA 504 down payment requirements covers when that applies.
What Lenders Look For in an Acquisition
When you finance the purchase of an existing business, lenders look closely at:
- The business’s financial history, including tax returns and cash flow
- Your experience in the industry or in managing a business
- A clear transition plan, including whether the seller will stay on to help
- The value of the real estate and equipment, supported by appraisals
- Your personal credit and financial strength
For more on how lenders evaluate applications, read what lenders look for when evaluating a business loan application.
Run the Numbers
Before you make an offer, it helps to see what the financing could look like. Try our 504 loan calculator to estimate payments on the real estate and equipment portion of your purchase.
Talk With Our Team
We help business owners across Utah, Idaho, and the Intermountain West use SBA 504 loans to buy buildings and equipment, including as part of a business acquisition. If you’re considering a purchase, we’d be glad to help you think through the structure.
Apply now or call us at (801) 627-1333.