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Difference Between SBA 504 loan and SBA 7a Loan

An SBA 504 loan or an SBA 7a loan?

With as many loans available for small businesses, how can you find out which one is right for you, like between a SBA 7a loan or a 504 loan? While you may not be approved for one type of loan, there are other options available to help you.  This article will look at two common loans, and which ones are right for you.

Knowing you have options will increase your chances of getting approved for a small business loan.  SBA 504 and SBA 7a loans are available for those looking for small business loans.  This article will tell you what is required, and the main differences between the loans.

SBA 504 loan

The SBA 504 loan allows small businesses to receive financing for the purchase of fixed assets.  Some of the most common forms of fixed assets are real estate and machinery.  There are different types of capital needs, which different loans can account for.

The owner must provide at least 10 percent of the cost, a lender provides 50 percent, and a third party, typically a Certified Development Company puts up the remaining 40 percent. CDC’s are non-profit organizations, and can be found all over the nation.

SBA 7a loan

SBA 7a loans are the most common form of small business loans.  These loans are typical for businesses with special requirements.  There are different stipulations a business must meet before they can be approved for a loan.  There are numerous loans available for 7a candidates.

The SBA 7a loans can help small businesses with disasters, microloans, and other loan programs.  They can help businesses expand, and provide short term loans for those that need it.  SBA 7a loans are smaller than SBA 504 loan, and carry different stipulations.

Main Differences

While both loans provide assistance to small businesses, one loan is going to be better than the other.  Here are some of the major differences between the two types of loans.

  • An SBA 504 Loan
    • Minimum loan is $125,000
    • Maximum loan is $20 million
    • Fixed interest rate
    • At least 10-year term (for machinery)
    • 20-year term for real estate
    • Down payment of 10 percent by borrower
    • Perfect for real estate or machinery
  • SBA 7a Loan
    • Minimum loan is $50,000
    • Maximum loan is $5 million
    • Interest rates can vary, but there are fixed rate options available
    • Up to 25-year term rate for real estate
    • Up to 10 years for business acquisitions
    • Working capital is a 5-7-year term
    • Weighted with mixed use requests, such as capital and business acquisition
    • Minimum of 10 percent down payment, often can be more

Considering the differences between the two loan types, depending on your business needs, one loan will work better than the other.  There are different eligibility requirements for each loan, and applying can seem like a never-ending process.

Though there are vast differences between the two, there are some similarities.

Similarities between a SBA 504 loan and a SBA 7a Loan

There are some similarities between the two loans, aside from being loans.  They should also be for-profit, work in the U.S. and must have a feasible business plan.  There cannot be access to alternative funds from other sources to be eligible for the loans.

Factors such as credit scores can affect a small businesses eligibility.  For the most part, if the eligibility requirements are met, most banks will approve for the loan.  You can schedule a meeting to determine if you’re able to secure the loan, and what the application process looks like.

Loan Fees

As with most loans, there are fees associated with the loans.  For 504 loans, fees can be financed into the loan.  Fees can be negotiated for the 50 percent of the bank loan, and legal review fees may be applied.

7a loans can also incorporate fees into the loan.  The fees will vary with the size of the loan, and an addition fee can be added on for loans over $1 million.  This fee is typically about .25 percent, but the fees can be decided by the banks discretion.  It’s important to understand what fees and costs are associated with your loan before signing the paperwork.

Conclusion

Small businesses do have options when it comes to getting a loan.  Whether it’s for real estate, machinery, or capital, there are plenty of loans and preferred lenders available to help you with your goals.  Though the SBA 7a and SBA 504 loan are available, you should consult with the bank to find out if you’re eligible.

There are different stipulations to become eligible, but speaking with a lender can clear up any confusion.  When it comes to improving business, it’s important to know your options.  You can find a loan that will best fit your needs.