What’s the difference?: SBA 7a Loan vs SBA 504 Loan

What are the different kinds of SBA loans?

Small businesses are an essential part of the United States economy. In order to help support and protect these innovative job creators, the United States Small Business Administration (SBA) offers a huge variety of tools and resources.

The most vital thing the SBA offers small businesses is access to secure growth capital through their SBA loan programs.

Right now, two of the most impactful, commonly used loans offered by the SBA are the 7a and 504. Learn the difference between the SBA 7a loan and the SBA 504 below.

What is a SBA 7a loan?

This loan is one of the most popular loans available to small businesses in the U.S. due to its accessible rates and comfortable loan terms. The maximum loan amount for a 7a loan is up to $5 million.  SBA 7a 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

The amount lent for a 7a loan maxes out at $5 million. In general, businesses need to do the following to be considered eligible for one of these loans:

  • Be a small business, as defined by the SBA Off Site Link
  • Operate for profit within the United States or its possessions (“possessions” meaning, for example, associated territories or districts, like Puerto Rico or the District of Columbia)
  • Already have reasonable invested equity with proof of explored alternatives before seeking loan
  • Have the ability to demonstrate need and prove sound business purpose for loan amount
  • Possess no existing delinquent debt to the United States government

Note that these listed eligibility requirements are not exhaustive. Refer to the SBA’s website Off Site Link for a more comprehensive set of rules regarding loan eligibility.

What are the benefits  of an SBA 7a loan?

Benefits of  SBA 7a Loans

  • Flexible loan terms up to 25 years
  • Both fixed- and variable-rate options
  • 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 creation of 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. In order to be considered a CDC, these partners need to be certified and regulated by the SBA.

504 loan amounts are maxed at $5 million. There is one exception to this rule, and that's for energy projects that meet certain parameters. Those entities can receive 504 loans for up to $5.5 million per project with a limit of three individual projects.

In general, 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 use of the funds.

Visit the SBA’s website Off Site Link for a comprehensive list of eligibility requirements.

What are the benefits of an SBA 504 loan?

Benefits of 504 Loans

  • 504 loans are able to fund up to 90% of qualifying projects, more than other comparable loans
  • Fixed rates make these loans stable
  • Typical down payments for 504 loans are only 10%
  • These are not balloon loans, protecting borrowers from unexpected balloon payments Off Site Link
  • 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 7a 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.