SBA 504 and SBA 7(a) loans are small business loans guaranteed by the U.S. government and issued by financial institutions, usually banks. SBA 504 loans are used to finance real estate purchases and renovations. SBA 7(a) loans provide working capital to businesses.
If you need a loan for something other than purchasing real estate or equipment, an SBA 7(a) loan is the right choice. It can be used for a broader range of purposes, such as working capital or business expansion. Real estate development can be a part of that, but it doesn't have to be.
When financing the purchase of real estate or equipment, you can choose between an SBA 7(a) loan and a 504 loan. Here are some key similarities and differences:
To better understand the unique needs of your business, we'll begin by completing a short survey.
Once you find your perfect match, our team will be happy to guide you through the next steps of the process.
SBA 7(a) vs. 504 Loans: Which is Right for You?
Both 7(a) and 504 loans can be good options for many types of businesses, and choosing one may be difficult for some businesses. However, business owners who meet any of the following specific criteria may want to consider choosing one or the other:
You need working capital to purchase inventory and supplies, and to fill cash flow gaps.
You need financing for real estate or equipment, but you don’t meet the job creation or public policy goal requirements for an SBA 504 loan.
I would like a faster SBA loan application process.
We can also accommodate variable interest rates.
You can provide collateral.
You need capital to purchase, lease, renovate, or improve commercial property, buildings, or equipment.
They can show they are creating jobs, retaining jobs or achieving public policy goals.
You can handle a slower loan application process.
I would like a fixed interest rate.
You are willing to offer the asset you are financing as collateral.
Key Differences Between SBA 504 and SBA 7(a) Loans
Up to $5 million, or $5.5 million for small manufacturers or certain energy projects.
Construction, property purchase, property renovation and equipment financing.
It can be used for a variety of purposes, including working capital, business expansion, acquisition of other businesses, real estate purchases, real estate renovations, equipment financing, and debt refinancing.
10 years for working capital and equipment, and 25 years for real estate.
A fixed interest rate linked to U.S. Treasury bonds.
A fixed or variable interest rate based on the prime rate plus the lender's spread.
SBA guarantee fee, CDC fee, bank fee.
SBA guarantee fees and bank fees.
Down Payment Requirements
10% but can be higher for start-ups or properties with specific uses.
The asset against which the loan is made acts as collateral.
Loans over $50,000 may require collateral.
The business must have net assets of $15 million or less and average net revenues of $5 million or less.
Projects must meet job creation and job retention goals or other public policy objectives.
Be a commercial enterprise located in the United States or a U.S. territory.
Meets the SBA's definition of “small.”
Be a commercial enterprise located in the United States or a U.S. territory.
They should be trying to use alternative sources of funding.
SBA 7(a) Loans: Great for General Business Financing
For most small business owners who need general business financing, an SBA 7(a) loan is a great option. SBA 7(a) loans are flexible, low-interest business loans that are suitable for a variety of business needs.
Any of the following are eligible uses for an SBA 7(a) loan:
The purchase, construction, or renovation of commercial real estate (but most investment properties are excluded).
Acquiring fixed assets such as equipment, fixtures and furniture.
Purchase land for your business.
SBA 7(a) Loan Eligibility
Any U.S.-based business that meets the SBA's definition of “small” (which varies by industry) can apply for an SBA 7(a) loan. You'll also need to prove that you've invested in the business, and lenders have additional requirements.
SBA 7(a) Loan Interest Rates and Fees
Interest rates on SBA 7(a) loans can be fixed or variable. Current SBA loan rates represent a spread over the prime interest rate, which is a market rate that fluctuates based on government action.
Interest rates on SBA 7(a) loans are similar to those on traditional bank loans, making them one of the most affordable options for small businesses.
The main fee for an SBA 7(a) loan is the SBA guarantee fee. The SBA charges a guarantee fee to ensure that the government has funds to repay the lender if the business is unable to repay the loan. Lenders may pass it on to the borrower.
SBA 7(a) Loan Security
Most SBA 7(a) loans require some sort of collateral, and for loans over $50,000, the SBA requires lenders to use the collateral policy for similarly sized non-SBA commercial loans.
Lenders can secure the loan by taking a lien on all assets financed by the loan and the business's existing fixed assets. If the loan is not fully secured at the time, the bank may also take a lien on the business owner's personal home and other personal assets.
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SBA 504 Loans: Great for Financing Fixed Business Assets
SBA 504 loans (officially known as SBA 504/CDC loans) are more specialized loans than 7(a) loans. 504 loans are designed for business owners who need funds to acquire or improve fixed assets, such as land, buildings or equipment, and whose projects promote economic development or other public policy goals.
The structure of an SBA 504 loan is more complex than an SBA 7(a) loan and consists of three parts:
Bank Loan (50%): A bank or other direct lender lends 50% of the loan amount.
CDC Loan (40%): An SBA-approved Certified Development Company (CDC) finances 40% of the loan amount.
Borrower Down Payment (10%): The borrower pays 10% of the loan as a down payment.
CDCs are local, nonprofit lending institutions that promote economic development in their communities by participating in SBA 504 loans. The SBA accredits and regulates CDCs.
A typical business owner is required to put down 10% as a down payment on an SBA 504 loan. However, if your business has been in business for less than two years, or if you're building a property that will only be used for one purpose, such as an amusement park or gas station, you'll need to put down 15%. If you meet both conditions, your down payment increases to 20%.
504 loan funds cannot be used for investment properties. If you are financing a new construction property, at least 60% of the building must be owner-occupied immediately after construction is complete, and only 20% of the space can be rented long-term.
SBA 504 Loan Eligibility
For every $90,000 that CDC lends, applicant businesses must create or retain at least one job – this figure rises to $100,000 in territories and devolved areas, and $140,000 for small manufacturers – meaning businesses that meet these requirements will have to create fewer jobs overall than those that don't.
If they can’t demonstrate they meet the job creation or job retention requirements, they can instead achieve other public policy goals, such as promoting the growth of minority- or women-owned businesses or reducing energy consumption.
SBA 504 Loan Interest Rates and Fees
SBA 504 loans are fixed-rate loans. Their interest rate is pegged to the interest rate on U.S. Treasury bonds.
SBA 504 loans have slightly higher fees than 7(a) loans: borrowers must pay an upfront guarantee fee, an annual servicing fee, and a CDC processing and servicing fee.
SBA 504 Loan Security
Most SBA 504 loans are self-secured, meaning the underlying fixed asset serves as collateral.
Anyone who owns more than 20% of a business is required to sign a personal guarantee for an SBA 504 loan. Even business owners with a strong credit history and good financial standing will be required to sign a personal guarantee to secure the lender.
A version of this article originally appeared on NerdWallet subsidiary Fundera.