SBA 504 Loans vs SBA 7(a) Loans

There are two popular funding programs by the Small Business Administration (SBA) and they are SBA 504 loans and SBA 7(a) loans. If you are starting or growing your business, you will most likely come across these two types of loans. Each loan has a specific set of requirements and terms based on the type of loan and the amount of the loan. Although they do have some similarities, they are not the same. When applying for an SBA loan, it’s important to note that they are not directly offered by the SBA. The SBA works with banks, business lenders and credit unions.

SBA 7(a) loan

A small business owner can obtain an SBA 7(a) loan from a bank, credit union, or other lending institution. This loan is best for you if you need working capital, purchase new equipment, expand into new locations, or acquire an existing business. The fact that it is very flexible in it its terms is what makes it appealing to many small business owners and start-ups.

If you are looking to apply for this loan, there are several eligibility requirements you need to meet: 

Borrower requirements

  • Small for-profit business
  • Must have fewer than 500 employees and less than $7.5 million revenue each year for the past 3 years
  • United States business
  • In an eligible industry (for profit and legal businesses)
  • Good FICO score (preferably above 680)
  • Able to provide collateral
  • Enough cash flow to meet debt obligations
  • Cannot have access to alternative funds
  • Strong personal and business credit
  • Strong business financials
  • Strong business plan

The maximum amount for the SBA 7(a) loan is $5 million with a minimum of $50,000. Terms are up to 25 years on real estate and up to 10 years on business equipment and acquisition and 7 years for working capital. The down payment is negotiable but typically a minimum of 10%-15%.

The documentation required to apply includes federal income tax returns, financial and income statements, and balance sheets. Personal guarantees are also required when applying for an SBA 7(a) loan. If the loan is less than $25,000 it does not require collateral. Personal real estate can be used as collateral if business assets are unavailable.

The collateral you provide is split between the SBA and the lender. Acceptable forms of collateral include equipment, real estate, or any other assets that are of high value that they could sell if needed. By putting up collateral, your chances of getting approved increases as it shows the SBA that you are fully invested in the growth and success of your business.

SBA 504 Loan

The second type of SBA loan is the 504 loan and can also help small business owners to grow or maintain their business. It is best for small business looking to finance commercial real estate or large equipment for use in business operation. This requires only a 10% down payment by the owner and the funding amounts range from $125,000 to $5 million and is dependent on the size of the project.

You should consider a 504 loan if you need to purchase land or existing buildings, make improvements on existing facilities, or purchase equipment and machinery.

If you are looking to apply for this loan, there are several eligibility requirements you need to meet: 

Borrower requirements

  • Must be for-profit business
  • United States business
  • Net worth of less than $15 million and net income less than $5 million
  • In an eligible industry
  • Good FICO score
  • Cannot have access to alternative funds
  • Strong personal and business credit
  • Strong business financials
  • Strong business plan

Unlike the SBA 7(a) loan, the terms for the 504 loan is fixed whereas the 7(a) has more variable terms. 504 loans have 10, 20, and 25-year terms. 504 loans also do not include servicing and legal fees. Some of the other fees that borrowers may have to pay are upon the policies of the lender. It includes origination fees up to 3.5%, packaging fees, broker fees, and closing costs. These fees can be added to the total cost of the loan.

To qualify for an SBA 504 loan a minimum credit score isn’t required but a strong score will improve your chances of getting approved. The required to documentation needed when applying is personal financial statements, federal income tax returns, income states and balance sheets. Newer business that have been in operation for 2 years or less will need to submit a cash flow analysis.

The lending process is similar to that of bank loans and are often quicker to receive funds from than 7(a) loans because no collateral is required. The prepayment penalty for 504 loans is less expensive than the 7a in fees and the prepayment amount.

Which SBA loan is best for you?

As you can see both SBA 7(a) loans and 504 loans are great for small businesses looking for funds. The 7(a) loan offers more flexibility for loans with mixed use of proceeds. The 504 loan is best for financing large projects. Although they are similar in some ways, each one should be carefully considered to determine which is best for your business.