SBA Loans: Comparing the 504 and 7(a) products | Fora Financial Blog
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SBA Loans: 504 vs. 7(a)
November 20, 2017
SBA-Loans--504-vs-7A

SBA Loans: 504 vs. 7(a)

SBA is a government loan program that offers great loan terms for small businesses. While the SBA doesn’t directly loan money to businesses, they do work with banks and CDCs (Certified Development Companies) to guarantee loans in case the business defaults. Banks then loan money to the business as an SBA loan.

In this post, we’re going to examine two different types of SBA loans – 504 and 7(a). The SBA 504 loan is more difficult to qualify for, and has use restrictions. Don’t discount the SBA 504 loan, though. If you need to purchase land, owner-occupied real estate, or heavy equipment, the SBA 504 loan is a viable option for you.

The SBA 7(a) loan is the most popular SBA loan program. It can be used for additional working capital, furniture, interior building updates, inventory and other needs.

The differences between the 504 and 7(a) loans:

Benefits

SBA 504 loans are great for large projects, which can be up to $12.5 million with an equity injection limited to only 10 percent of the total project.

Tom Pretty, Head of SBA Lending at TD Bank, had this to say about the benefits of 504 loans:

“504 loans have many advantages including: fewer fees than other SBA products; 20-year fixed pricing on the CDC portion of the deal, which is also a below-market rate. They allow for much larger loans than the 7(a) product, as there is no official borrowing cap.”

In contrast, SBA 7(a) loans are better for company-growth. This allows for a broad range of ways to use the loan. These include:

  • Startup costs
  • Purchasing new land (including construction costs)
  • Repairing existing capital
  • Purchasing or expanding an existing business
  • Refinancing existing debt
  • Purchasing equipment, machinery, furniture, fixtures, supplies or materials

As you can see, the 7(a) loan does have some overlap with the 504 because of its mixed-use nature.

Application Process

First, determine if your business is eligible (discussed below). Then find an SBA loan provider or broker. Next, complete all the SBA forms and submit them to your lender.

Eligibility

For both loan types, the business must have a strong business plan, be a for-profit business, have a demonstrated ability to pay, and relevant management experience. Below are additional requirements specific to the SBA 504 and SBA 7(a):

 

SBA 504 SBA 7(a)
Equipment must have a 10-year minimum life. All assets financed must be used to direct benefit of the business.
Business net worth of less than $15 million Good credit (uses personal FICO score)
Owner occupied property (51 percent for existing construction and 60% for new) 10 percent or more down payment
Up to 10 percent down payment

 

Financing Amounts

504 loans usually cap at $5 million but sometimes are financed up to $20 million.

Since 7(a) loans often don’t require the large capital outlay of a 504 loan, they are capped at $5 million.

It’s important to understand that there is a limitation of SBA dollars available as loans. Also, choosing the right loan for a specific purchase will result in optimal use of available SBA dollars.

The 504 loan doesn’t use as many SBA dollars as the 7(a) loan. For example, where a 504 loan might only use 40 percent of SBA dollars, a 7(a) will use 75 percent. This means when you utilize a 7(a) loan, you use up more SBA dollars than with a 504 loan.

That’s why using a 504 loan for large real estate or equipment related purchase is optimal use of SBA dollars. On the other hand, paying for inventory through a 7(a) is the best use of SBA dollars for those types of purchases.

Term Lengths

504 loan terms are 20 years for real estate and 10 years for equipment. 7(a) loans terms are up to 25 years on real estate and up to 10 years on business acquisition and equipment. Additionally, 7(a) loans have 5 to 7 year terms for working capital and a weighted average for mixed-use request.

Fees

Both loans require personal guarantees and collateral. Prepayment penalties also come with both loans, which decline depending on the age of the loan and amount prepaid.

Fees on a 504 loan will not rise as the loan amount rises, which can happen with a 7(a) loan. The 7(a) loan includes an additional .25 percent charged to loan portion above $1 million.

The 504 loan does include servicing and legal fees but generally has lower overall fees than 7(a) loans.

Which Loan Is Right for Your Business?

In general, the 504 loan is oriented toward commercial real estate and equipment. The 7(a) loan is for mixed-use or general purpose.

If you need a business loan for working capital, inventory or for general flexibility of use, the 7(a) loan will do the job. For land and heavy equipment purchases, the 504 is your go-to loan.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].
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