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One of the biggest challenges in taking out a small business loan is figuring out which loans to apply for. The U.S. Small Business Administration (SBA) works with lenders to offer a variety of financing opportunities for small businesses that might not be approved for other types of loans.
When you compare SBA loans to conventional business loans, you’ll see that the former typically have more competitive rates and terms because the federal government guarantees a portion of the loan funds, potentially lowering the risk for lenders.
However, there are significant differences even within the SBA loan category. Here, we’ll look at two popular SBA loan programs – SBA 504 loans vs. 7(a) loans. Both offer high maximum loan amounts, but they vary in terms of how you apply and how you can use the loan funds.
Key Points
• SBA 504 loans emphasize job creation, while 7(a) loans support general business growth.
• SBA 504 loans fund major assets like buildings and equipment; 7(a) loans cover working capital and inventory.
• SBA 504 loans are obtained through certified development companies (CDCs), whereas SBA 7(a) loans are obtained through private lenders.
• Both SBA 504 and 7(a) loans typically require a down payment of at least 10%.
• SBA 504 loans offer terms up to 25 years, while 7(a) loans for non-real estate go up to 10 years.
Overview of SBA Loan Programs
The Small Business Administration was created by President Dwight D. Eisenhower in 1953. Its purpose is to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.” A large part of that mission has been addressed through a variety of SBA loan programs.
Small businesses that meet the SBA’s criteria can apply for a wide range of SBA loans. Each type of loan has its own maximum amount and terms and is designed for specific purposes. Since there are so many types, pinpointing the one that best serves your needs can require some research.
Recommended: What Are SBA Loans?
How SBA Financing Supports Small Businesses
SBA loans are generally issued through different kinds of lenders but guaranteed in part by the SBA. This enables the lenders to offer more favorable terms and helps small business owners who might not qualify for bank loans obtain funding.
Why Comparing SBA 504 vs. 7(a) Loans Matters
Different SBA loans are designed for different uses and can involve different requirements, maximum amounts and loan repayment periods, and interest rate terms. While there can be overlaps between SBA 504 loans vs. 7(a) loans, it’s important to review the facts about each kind of loan to be sure that you’re applying for the one that makes the most sense for you. Knowing which loan type suits you better may boost your chances of qualifying for the loan and help you get terms that will work for your purposes.
What Is an SBA 504 Loan?
An SBA 504 loan provides financing for small businesses to fuel job growth in their local communities. Loans are available up to $5.5 million. The application process for these loans is unique because it goes through a certified development company (CDC).
A CDC is an SBA-approved organization that typically provides 40% of the loan from SBA funds and then sells another 50% of the loan to a third-party financial institution. The borrower provides the remaining 10% for the project.
Key Features and Terms
In addition to the requirement that you apply through a CDC, an SBA 504 loan has a number of other features that set it apart. These include the following elements.
Eligible Uses for SBA 504 Loan Funds
Eligible uses for the funds from an SBA 504 loan must be intended to create job growth and can include:
• Purchasing or constructing buildings, new facilities, or equipment
• Improving or modernizing existing facilities, land, streets, or parking lots
Borrowers may not use 504 loans for inventory, working capital, or debt consolidation.
Typical Repayment Terms and Interest Rates
SBA 504 loan interest rates tend to be low compared to other types of financing. Interest rates for repayments to the CDC are fixed for the life of the loan. Repayment terms can last 10 years, 20 years, or 25 years.
Recommended: SBA Loan Requirements
What Is a 7(a) Loan?
SBA 7(a) loans are the most common type of SBA loans. The maximum loan amount is $5 million and the funds can be used for a wide range of purposes.
Program Overview and Terms
The SBA guarantees the majority of the loan, but you must apply for it directly from an SBA-approved lender. The loan approval process typically speeds up if you choose an SBA Preferred Lender, because these lenders have a positive history processing SBA loans.
In addition to the standard 7(a) loan, there are other types available as well. Each has its own eligibility criteria, purposes, maximums, and terms.
• 7(a) Small Loan
• Export Express
• Export Working Capital
• International Trade
• CAPLines
Eligible Uses for 7(a) Loan Funds
Funds from an SBA 7(a) loan may be used for a broad range of purposes, including:
• Real estate
• Working capital
• Debt refinancing
• Purchase of supplies, furniture, and fixtures
Repayment Terms and Interest Structures
Real estate loan repayment can extend as long as 25 years, while all other 7(a) loans last up to 10 years.
Repayments are generally made on a monthly basis, and the interest rate can be either fixed or variable.
Recommended: SBA Loan Calculator
Main Differences Between SBA 504 Loans and 7(a) Loans
Though both types are SBA loans, 7(a) loans vs. 504 loans are two very distinct programs. It’s wise to understand the differences before you start the application process.
Use of Funds
When it comes to how funds may be spent, 504 loans focus on job creation, while 7(a) loans are meant for expanding business operations.
With a 504 loan, you can use the funds for significant expenditures, such as purchasing new buildings, land, or facilities. Alternatively, you can improve existing property. And 504 funds may also be used to buy heavy equipment and machinery.
A 7(a) loan may be used more broadly. Businesses may still purchase real estate and equipment with these funds. However, the loan may also be used for working capital, inventory, and more.
Application Process
The application process for 7(a) loans differs significantly from that for 504 loans.
A private lender originates a 7(a) loan. You may opt to work with an SBA-preferred lender to expedite the process.
A 504 loan, on the other hand, requires you to apply through an SBA-certified CDC. These community organizations specialize in economic development.
Loan Structure and Funding Sources
A 504 loan involves multiple parties. About 40% of a business’s loan comes from a CDC, and as much as 50% comes from a lender. The business usually puts down the remaining 10%.
Generally, you apply for a 7(a) loan through an SBA-approved lender. While the SBA guarantees a portion of the loan, you are expected to provide a down payment (which can vary) and pay back the loan in its entirety to the lender, usually in monthly payments.
Maximum Loan Amounts and Guarantees
The maximum amount you can borrow with an SBA 7(a) loan is $5 million, though it varies by the type of 7(a) loan you choose. For 504 loans, the max is $5.5 million.
The amount that the SBA guarantees your lender it will pay if you default also varies. For an SBA 7(a) loan, it’s typically either 75% or 85%, depending on the size of the loan. With a 504 loan, the SBA guarantees 100% of the portion of the loan extended by the CDC.
SBA 504 vs. 7(a) Loans
| Feature | 504 Loans | 7(a) Loans |
|---|---|---|
| Maximum loan amount | $5.5 million | $5 million |
| Use of funds | Purchasing, improving, or modernizing buildings, land, facilities, etc. | Working capital, inventory, debt consolidation or refinancing, etc. |
Recommended: What Is a Business Startup?
Fees and Down Payments for SBA 504 Loans and 7(a) Loans
The SBA requires an upfront guarantee fee on all loans, which is charged on the portion of the loan guaranteed by the federal government. You may also be charged lender fees and a down payment. Here’s a look at 7(a) loans vs. 504 loans in terms of these elements.
SBA 504 Loans
• Down payment: The borrower must supply 10% of the loan amount as equity. An additional 5% is required for startups and/or loans for special-use property (such as a church, school, hospital, museum, etc.). Forty percent of the loan goes through the CDC using SBA funds, and 50% generally comes from a lender.
• SBA Guarantee Fee: The upfront fee is currently set at 0.5% of the loan. (This fee may be waived through September 2026 for small manufacturers.)
7(a) Loans
• Down payment: The borrower must typically make a 10%-15% down payment.
• SBA Guarantee Fee: Depending on your loan’s size, the upfront guarantee fee generally ranges from 0.25% to 3.75% on the guaranteed portion of the loan. (This fee may be waived through September 2026 for small manufacturers.)
Ongoing Servicing and Closing Costs
Both SBA 7(a) and 504 loans can be subject to ongoing service fees and closing costs.
SBA 7(a) loans may carry an annual service fee of up to 0.55% of the guaranteed portion of the loan; 504 loans have an annual fee of 0.209% or 0.2115% of the loan. (Some fees may be waived through September 2026 for small manufacturers.)
For 504 loans, closing costs may run as low as 2% to 3% or more of the loan amount. For a 7(a) loan, closing costs may amount to anywhere from 2% to 5% of the loan amount.
SBA 504 vs SBA 7(a) Loan: What’s Right for Your Business?
Choosing between an SBA 504 loan and a 7(a) loan may largely depend on how you plan to use the funds.
When You Might Consider an SBA 504 Loan
A 504 loan should be used to expand or improve your business in a way that aids job growth. Because you apply through a CDC specializing in economic development, it can be a good idea to craft a business plan demonstrating this impact. Buildings, land, and facilities can be purchased or modernized with 504 funds. Long-term machinery and equipment are also considered eligible expenses. A 504 loan might be a good choice if these guidelines align with your intentions.
However, remember you’re not allowed to use the funds for most debt consolidation, inventory, or working capital. While these might help grow your business, they likely won’t substantially benefit the local workforce.
When You Might Consider an SBA 7(a) Loan
There are far fewer restrictions on using 7(a) loan funds. For instance, eligible expenses include short-term and long-term working capital, making 7(a) loans potentially preferable if you want to expand a business if your plans won’t meet the 504 job creation requirements. A 7(a) loan can also be used to acquire a new business or purchase real estate for your company.
The Takeaway
It’s wise to take the time to evaluate all of your business’s financing options. As you examine SBA loan requirements and consider your needs, you may decide that neither an SBA 7(a) nor a 504 is right for you.
To get an idea of all your small business loan options or to apply for a small business loan online, check out Lantern by SoFi. You can use its fast online search to look for a personalized small business option in minutes.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What’s the difference between the 504 and 7(a) SBA loans?
There are several differences. First, the application process is different. With a 504 loan, you apply through a certified development company (CDC). SBA 7(a) loans go through regular business lenders. There are also differences in how you may use the funds. Acceptable uses for 504 loans are more restrictive, and you must demonstrate job creation. They’re usually used to purchase or improve major assets like property or machinery. A SBA 7(a) loan vs. a 504 has a broader range of uses and may also be used for working capital, inventory, and debt consolidation.
Is an SBA Express loan a 7(a) loan?
Yes, SBA Express loans are 7(a) loans. This program has a lower maximum loan amount ($500,000) but offers a fast approval time that can be just 36 hours.
Which SBA loan is better for purchasing real estate or equipment?
If you’re looking to purchase commercial real estate or heavy machinery/equipment, the SBA 504 loan is typically seen as the best choice.
Can a business apply for both SBA 504 and 7(a) loans?
If you have strong credit and a stellar business, the SBA and your lender might be fine with you combining SBA 7(a) and 504 loans.
How do down payment requirements compare between SBA 504 and 7(a) loans?
Though the amount you pay can be similar, SBA 7(a) vs. 504 loans work differently in terms of down payments. For an SBA 504 loan, the borrower must supply 10%-15% of the loan amount as equity. For an SBA 7(a) loan, a down payment of 10%-15% is usually required, though some lenders may ask for more.
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