If you have done any research into the Small Business Administration’s loan programs, you may have had a hard time understanding the mountain of information about the different offerings. We will put two of the most popular—the SBA 7(a) vs. 504—against one another to help you find which works best for your needs.
SBA Loan Overview
Both the SBA 7(a) and 504 loan programs are initiatives by the Small Business Administration to open access to affordable funding for small businesses. Getting approved for traditional bank loans is tough or impossible for many owners, so the SBA provides guarantees on portions of these loans to mitigate the risk lenders take on when working with small businesses.
Basic requirements apply to all of the programs, but most small businesses are eligible to receive SBA loans. To qualify, you must:
- Be a for-profit business operating within the U.S.
- Fall under SBA size standards
- Have invested personal equity into the business
- Have exhausted other financing options, including traditional bank loans
- Have no previous delinquencies on government loans
Businesses that cannot receive loans include those who operate in gambling, lending, speculative businesses and companies that promote or partake in illegal activity.
If you and your business meet the required criteria and aren’t on the exempt list, you will also need to convince the SBA that they’re smart to invest in the future of your business. They’ll want to know what you need the money for and how you plan to utilize it to be successful.
There are a few different loan types, but two of the most popular for expanding your small business are the 7(a) and 504 programs. Learning their similarities, differences, restrictions and how their terms can affect your financial future will help you find the perfect match.
Similarities of SBA 7(a) and 504 Loans
Other than the basic eligibility requirements, these loan programs share some similarities. Keeping with the goals of the SBA, they offer flexible long-term repayment options with limited fees and lowered rates than alternative lenders.
Obtaining one, however, is an exercise in patience. Though the application process is fairly straightforward, it can take upwards of 90 days to receive approval, and more time yet to acquire the funds. The exception to this is SBA Express Loans, subsets of the 7(a) program, that promise funding sooner for qualified candidates.
Both programs can be used for similar purposes, although 504 loans are restricted to fixed assets and the refinancing of debt tied to them. Loans under the 7(a) umbrella, however, can fund a broad spectrum of business needs.
SBA 7(a) Loans Overview
If you have ever discussed SBA loans, odds are 7(a) loans and their terms were the subject. The 7(a) program is comprised of multiple loan types, but most have the same basic characteristics, with a few exceptions.
Types of 7(a) Loans
Standard 7(a) Loans
SBA 7(a) loans are by far the most popular due to their versatility. A standard 7(a) loan can be used for working capital, debt refinancing, business acquisition and buying fixed assets, such as real estate and equipment. The loan reaches maturity in 10 to 25 years depending on how the funding is used.
You can acquire up to $5 million through the SBA 7(a) loan program. The SBA guarantees 85 percent of the principle for loans under $150,000 and 75 percent on loans over that value.
SBA Express Loans
Other popular options under the 7(a) umbrella are the Express and Express Export loans. The purpose of these loans is to expedite the application process, so businesses who need money fast have access to it. Instead of waiting up to 90 days just for approval, you could expect to get an answer within 36 hours and funding before that 90-day window closes.
General SBA Express loans carry the same use restrictions as the standard 7(a) program, but max out at $350,000. They also have a lower guarantee—50 percent—making them more difficult to qualify for due to the increased lender risk.
Express Export loans are made for companies who need help starting or growing their international business dealings. Traditional lenders find these borrowers riskier, so the SBA guarantees up to 90 percent on a maximum loan of $500,000.
Export Working Capital
Like Express Export loans, these give owners practicing international business the option to get funding to support those sales. They do differ, however, because they offer working capital of up to $5 million, although with the same 90-percent guarantee.
The Small Business Administration is focused on veteran-owned businesses, and have created the Veterans Advantage program to help them succeed. The program offers reduced fees for veterans with a 51-percent or more stake in their company that falls into one of the following categories:
- Honorably discharged veterans
- Active Duty service members eligible for the Transition Assistance Program (TAP)
- Service-disabled veterans
- Reservists or National Guard members
- Current spouses of service members who fit the above criteria
- Widowed spouses of service members who died in service or due to service-related causes
CAPLines are meant to help your business meet its short-term and cyclical working capital needs. The 7(a) program provides four different types to help business owners with varying needs:
- Seasonal: For financing seasonal inventory and/or accounts receivable
- Contract: For the cost of one or more contracts, sub-contracts or purchase orders, including overhead or administrative expenses
- Builders: For expenses related to the construction or renovation of a project
- Working: For short-term working capital and operating needs
CAPLines have maturity terms of up to 10 years except for Builders CAPLines, which have a maximum limit of 5.
SBA 7(a) Loan Rates and Fees
The SBA tries to keep rates and fees low for all of their loans to stay affordable for owners like you. Interest rates for 7(a) loans are negotiated between the borrower and the lender but are capped using the current prime rate as a base.
|Loan Amount||Maturity < 7 years||Maturity > 7 years|
|$25,000 or less||Base + 4.25%||Base + 4.75%|
|$25,000-$50,000||Base + 3.25%||Base + 3.75%|
|$50,000+||Base + 2.25%||Base + 2.75%|
For SBA Express and Export Express loans, lenders can charge 4.5 to 6.5 percent over the prime rate, depending on the amount borrowed.
You can expect a fee of up to 3-percent based on the amount of the guarantee that the SBA places on your loan.
SBA 504 Loan Overview
Unlike 7(a) loans, the 504 loan program has more of a targeted purpose. You are only able to use funding in this program to purchase or refinance fixed assets such as real estate or equipment.
The structure of these loans is also very different than their 7(a) counterparts, essentially acting as two loans to fund one project. After a down payment of at least 10 percent, the SBA backs up to 40 percent of your project or $5 million, whichever comes first. They do this through Certified Development Companies, or CDCs, that are nonprofits that help businesses by working with lenders to facilitate small business loans.
Lenders can cover up to 50 percent or more of the total loan. It’s important to note that lenders operate outside of the SBA’s purview. This means the amount, rates and terms are up to the lender’s discretion. The maximum total of these loans is $20 million, making them a better fit for larger projects.
The primary purpose of this initiative is to stimulate the economy, so there are strict job-creation goals you must meet to be able to obtain a 504 loan. With exceptions for some small manufacturers and those who will use the funding to achieve certain community development goals, you must create or retain 1 job for every $65,000 you borrow.
Terms, Rates and Fees for 504 Loans
Repayment terms for 504 loans will be based on what you are using the funding for. If you’re acquiring or renovating real estate, the CDC portion of the loan will have a length of 20 years, but the amount the lender covers will be paid off in 10. For equipment financing, the maturity terms are generally 10 and 7 years, respectively.
The borrower can negotiate rates and fees from the lender, so they’re not capped like 7(a) loans. Still, they tend to be favorable since the SBA is taking away a lot of the risk by offering up money through CDCs.
The CDCs offer fully amortized, fixed-rate loans to help you keep your finances stable. Interest rates for 504 loans change monthly based on the United States Treasury rates but are fixed to the current number on the day you sign. Your CDC will then impose a small fee (less than one-half of 1 percent) on top of that rate, generally bringing it up to 3-4 percent.
Three one-time fees will be included in your SBA 504 loan. A guarantee, CDC and servicing agent fee will be rolled into your monthly payment and paid off over the life of the loan. The total of the rates and fees are generally lower than their 7(a) counterparts and do not change as the total amount of the loan grows.
SBA 7(a) and 504 Loans: Choosing the Right Fit
Now that you have an idea of the details and uses of these loans, it’s time to consider which is the best choice for your business.
Think about what you will use the funding for. If you need money for inventory, starting your export business, business acquisition or refinancing general business debt, 7(a) loans are your only choice. Although 7(a) loans can be used for these purposes, 504 loans are tailored for buying or upgrading real estate and financing equipment, giving them better rates and fees for those purchases. If your business requires funding for those needs and something else, however, 504 loans will not be an option.
If you need quick cash to keep your business afloat, obtaining an Express loan under the 7(a) umbrella is a great option for you. Likewise, export businesses receive guarantees of up to 90 percent under this program, leading to favorable terms and higher approval rates.
If you’re still wondering what to do when comparing SBA 7(a) vs. 504 loans, make sure to do some more research before making your decision. Catch up on more about this topic and others on our blog, or contact one of our business advisors to find the right funding option for your small business.