If you have done any research into the Small Business Administration’s (SBA) 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 Loans: 504 vs. 7(a) Overview
|SBA 7(a) Loan||SBA 504 Loan|
|Maximum Loan Size||$5 million ($350,000 for Express loans)||$5 million (5.5 million for manufacturers)|
|Loan Rates||Variable: 6.5%-8.5% (8.75%-10.75% for Express loans)*||Fixed: Approximately 2.9%-3.25% (based on current 5- or 10-year Treasury issues)*|
|Loan Terms||Up to 25 years (varies by use)||10, 20 or 25 years (varies by use)|
|Who Qualifies||For-profit businesses; shows good character, credit, management and ability to repay.||Same requirements as 7(a), plus has a tangible net worth less than $15M and an average net income less than $5M after taxes for the preceding 2 years.|
*As of March 4, 2020
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 guarantys 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 if they:
- Are a for-profit business operating within the U.S.
- Fall under SBA size standards for small businesses
- 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 SBA 504 and 7(a) programs. Learning their similarities, differences, restrictions and how their terms can affect your financial future will help you find the perfect match.
SBA 7(a) and 504 Loan Similarities
In addition to 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 relatively straightforward, it can take upwards of 90 days to receive approval and more time to acquire the funds. The exception to this is SBA Express loans, subsets of the 7(a) program, that promise application review within 3 days.
SBA 7(a) Loans Overview
When most people think of SBA loans, 7(a) loans are what come to mind. The 7(a) program is comprised of multiple loan types, but most have the same basic characteristics.
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 4.5-6.5% over the prime rate, depending on the amount borrowed.
You can expect a fee of up to 3.75% based on the amount of the guaranty that the SBA places on your loan.
Types of 7(a) Loans
Within the SBA 7(a) program, there are several different types of 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. Loan terms vary based on the qualifications of borrowers and how funds are used. Generally, working capital, machinery and equipment loan terms fall within the 5- to 10-year range. If the proceeds of the loan are used to purchase real estate, terms could extend up to 25 years.
You can acquire up to $5 million through the SBA 7(a) loan program. The SBA guarantees 85% of the principal for loans under $150,000 and 75% on loans over that value.
SBA Express Loans
SBA Express Loans are designed 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.
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 guaranty—50%—making them more difficult to qualify for due to the increased lender risk.
Export Working Capital
Export Working Capital loans give owners selling internationally the option to get funding to support those sales. They do differ, however, because they offer working capital up to $5 million, with a 90% guaranty.
CAPLines are meant to help your business meet its short-term and cyclical working capital needs. The 7(a) program provides 4 different types to help business owners with varying needs:
- Seasonal: For financing seasonal inventory 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 Capital: 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 years.
SBA 504 Loan Overview
The 504 loan program has a targeted purpose. You are only able to use funding in this program to purchase, improve 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. SBA 504 loans require a down payment of at least 10%, after which a Certified Development Company licensed by the SBA funds up to 40% of your project cost, up to $5 million.
A third-party lender writing a 504 loan covers up to 50% 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, though interest rates are capped.
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 or 25 years. For equipment financing, the maturity terms are 10 years.
The borrower can negotiate rates and fees from the third-party lender, but they’re capped like their 7(a) counterparts. Still, they tend to be favorable since the SBA is taking away a lot of the risk by offering up money through CDCs.
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%) on top of that rate, generally bringing it up to 3-4%.
A guaranty, 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.
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 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 guarantys up to 90% under this program, leading to favorable terms and higher approval rates.