Small businesses are an essential part of the United States economy. To help support and protect these innovative job creators, the United States Small Business Administration (SBA) offers a wide variety of tools and resources.
The most vital thing the SBA offers small businesses is access to secure growth capital through its SBA loan programs.
Right now, two of the most impactful, commonly used loans offered by the SBA are the 7(a) and 504. Learn the difference between them below.
What is an SBA 7 (a) loan?
The 7(a) Loan Program is SBA’s primary business loan program which provides loan guaranties to lenders that allow them to provide financial help for small businesses with special requirements. SBA 7(a) loans are used for a variety of purposes, including:
- Making a purchase of equipment, furniture, fixtures, or supplies for a business
- Necessary short- and long-term working capital
- Purchase of real estate
- Refinancing current business debts
- Complete or partial changes of ownership
The maximum loan amount for a 7(a) loan is up to $5 million.
In general, businesses need to do the following to be considered eligible for one of these loans:
- Be a small operating business, as defined by the SBA.
- Operate for profit within the United States or its possessions (“possessions” meaning associated territories or districts, like Puerto Rico or the District of Columbia).
- Not be able to obtain the desired credit on reasonable terms from non-Federal, non-State, and non-local government sources.
- Be able to demonstrate need and prove sound business purpose for loan amount.
- Demonstrate a reasonable ability to repay the loan.
- Possess no existing delinquent debt to the United States government.
Note that these listed eligibility requirements are not exhaustive. Visit the SBA’s website for a more comprehensive set of rules regarding loan eligibility.
Benefits of an SBA 7(a) loan
- Flexible loan terms up to 25 years
- Both fixed- and variable-rate options
- Lower down payments
- Eligible to a wide variety of businesses
- Work directly with the bank on all loan requests
- Eligible fees as determined by SBA guidelines can be included in the loan
What is an SBA 504 loan?
SBA 504 loans offer long-term, fixed-rate financing that can be used for major fixed assets capable of promoting business growth and creating new jobs.
504 loans are offered through entities called Certified Development Companies, or CDCs, that act as community partners to the SBA. These partners regulate nonprofits and focus on promoting economic progress in their local communities. To be considered a CDC, these partners need to be certified and regulated by the SBA.
504 loan amounts are maxed at $5.5 million.
To be eligible for one of these loans, a business must be for-profit and operating in the United States with a tangible net worth below $15 million. An average net income of less than $5 million after federal income taxes for the two years preceding application is also required. In addition, businesses need to meet SBA size guidelines, have proven management expertise and be able to present a reasonable plan for the use of the funds.
Visit the SBA’s website for a comprehensive list of eligibility requirements.
Benefits of 504 Loans
- 504 loans can fund up to 90% of qualifying projects, more than other comparable loans.
- Fixed rates make these loans stable.
- Down payments for 504 loans can be as low as 10%.
- These are fully amortizing loans, protecting borrowers from unexpected balloon payments.
- CDC and the bank work together on all loan requests.
- Eligible fees as determined by SBA guidelines can be included in the loan.
There are many factors that determine which loan option — SBA 7(a) or SBA 504 — will be better for your small business. In general, the best choice will depend on your business and its unique plans, goals, and needs. To get started exploring what an SBA loan could do to help grow your small business, get in touch with the team of experts at Sunrise Banks today.
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