Small businesses seeking financing options often turn to the U.S. Small Business Administration (SBA) for assistance. Two popular SBA loan programs to promote business growth, the 504 loan and the 7(a) loan, appear similar at first glance. However, before applying, small business owners should understand that there are significant distinctions between the SBA 504 loan vs. 7(a).
To shed light on this topic, we’re breaking down the five critical differences between SBA 7(a) vs. 504 loans. Plus, we'll answer a few of your most frequently asked questions.
By understanding whether a SBA 504 vs. 7(a) loan is right for your small business, you can make an informed decision and confidently choose the financing that best suits your business needs.
What is an SBA 7(a) Loan?
Offered by the U.S. Small Business Administration (SBA) to help small businesses obtain the necessary capital for various purposes, this popular loan program provides small businesses with flexibility and favorable interest rates and terms on loans up to 5 million dollars. Small businesses can access funds for starting, expanding, or managing their operations.
SBA 7a Loan Requirements
To qualify for an SBA 7(a) loan, small businesses must meet specific criteria set by the SBA, including the following eligibility requirements:
- Your business must meet the SBA's definition of a small business, which typically depends on your industry and annual revenue.
- Fully operational business in the United States with the primary goal of making a profit.
- Must not be one of the types of ineligible businesses listed by the SBA
- The use of funds must be intended for specific purposes, such as working capital, debt refinancing, purchasing equipment, acquiring real estate, or change in ownership.
- Creditworthiness with a reasonable credit history to qualify.
- Demonstrate your ability to repay the loan.
For a quick assessment of your eligibility to apply for an SBA loan, you can use Hansa's SBA eligibility checklist. This interactive checklist serves as an invaluable first step in your SBA loan journey, saving you the time it takes to determine whether you qualify as a small business under the SBA definition and whether you meet the criteria for applying.
What is an SBA 504 Loan?
The SBA offers SBA 504 loans to help small businesses acquire fixed assets like real estate and equipment. These loans have long-term, fixed-rate financing options with a maximum loan amount of $5.5 million for a single loan or a maximum of $16.5 million for three projects.
This loan must be obtained through Certified Development Companies (CDCs), community-based organizations endorsed by the SBA.
SBA 504 Loan Requirements
To qualify for a 504 loan, your business must qualify according to the following standards.
- Operate as a for-profit company in the United States or its possessions
- Have a tangible net worth of less than $15 million
- Secure an average net income of less than $5 million after federal income taxes for the two years preceding your application
- Fall within SBA size guidelines
- Have qualified management expertise, a feasible business plan, good character
- Establish the ability to repay the loan
- Not be engaged in nonprofit, passive, or speculative activities
The Differences Between SBA 504 and 7a Loans
According to Noah Grayson, a strategic financial advisor at Real Estate Bees, “obtaining the right financing for your business is essential,” and that starts with understanding the distinct purposes and unique features of each loan.
We can analyze SBA 7a and SBA 504 loans in terms of their eligibility requirements, use of funds, loan structure, term length, and fees. Based on those variables, SBA 7a and SBA 504 loans have the following five critical differences.
Eligibility requirements for SBA 504 loans are more strict than they are for SBA 7a loans. An SBA 504 loan requires a specific job creation or retention focus for small businesses, and is often used for larger projects. However, an SBA 7a loan allows for a broader range of businesses, including startups and those with more minor financing needs.
Use of Funds
A 7a loan can contribute towards equipment purchases, provide working capital, facilitate purchasing inventory, or fund leaseholder improvements. On the other hand, the 504 loan is primarily associated with real estate activities.
A SBA 504 Loan features a three-part structure with funding from a Certified Development Company (CDC), a conventional lender, and the borrower. SBA 7(a) Loan structures can vary depending on the level of risk involved. Typically, a down payment of at least 10% of the loan amount is required, although it is commonly in the range of 20%-30%.
Loan Term Lengths
Loan term lengths for 7a loans vary between 5-7 years through 25 years, depending on the use of funds. On the other hand, 504 terms are more straightforward. Equipment purchases have a term of 10 years, while real estate-related purchases have the same 25-year term as the 7a loan.
Each loan option has associated fees that can be included in the loan financing. SBA 7a loans have a 0.25% surcharge for loans over $1 million. SBA 504 loans have two lenders involved and two sets of fees. The bank negotiates loan fees on half the loan amount, while the CDC charges a servicing fee and a legal review fee.
Can You Use Both SBA 504 and 7a Loans?
In short, yes, applying for and receiving both SBA 504 and SBA 7a loans is possible, especially if you have a strong business. While the SBA prefers borrowers to wait a bit between taking out loans, combining 7a and 504 loans could provide you with the best financing options. (If SBA 7a and 504 loans are not appealing to you, you can always explore other financing tools).
Frequently Asked Questions About SBA 7a vs. 504 Loans
How hard is it to get approved for an SBA 7A loan?
Getting approved for an SBA 7(a) loan can be moderately challenging. While the SBA provides flexibility compared to traditional lenders, approval depends on factors like being in business over two years, creditworthiness, and business stability with a healthy annual revenue.
Under what circumstances might a 504 loan be most appropriate for a business?
A 504 loan best suits businesses looking to acquire or improve fixed assets like real estate or equipment. It's ideal for expansion projects or property purchases where long-term, fixed-rate financing is preferred.
Do the new 2023 SBA loan rules make getting a small business loan easier?
The impact of new SBA loan rules in 2023 can vary. While some changes may streamline the application process, the overall ease of getting a small business loan depends on the specifics of your small business's situation.
Save Time and Money Before You Apply
With Hansa, you can access a free tool that finds the best offers you qualify for before you apply. Say goodbye to applying in the dark. Hansa sheds light on the information available to lenders and insurers about your business, empowering you to make informed decisions. Take charge of your business's future today. Sign up for Hansa and get started growing your small business.