SBA Loans — What’s the Difference between 7a and 504?

SBA Loans — What’s the Difference between 7a and 504?

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When it comes to loans, small business owners have a lot of options to consider. From selecting a lender to determining the type of loan you need, the path to financing can be a confusing one. Of the many places you may look, the Unite States Small Business Administration (SBA) could be a great resource for information on loans, and specifically, different loan programs that are exclusively available to small businesses.

Of those SBA loan programs, the SBA 504 and the SBA 7(a) programs represent options that, depending on your needs and intended outcome, can present many advantages to you as a borrower. It should be noted that SBA typically does not offer direct loans. Instead, these are guaranteed by the SBA and fulfilled through banks or Certified Development Companies (CDC’s).

SBA 7(a) and SBA 504 Loans

While both of these SBA loan types can help small business owners to grow or maintain their business, each differs in the purposes for which it can be used.

To start, let’s look at the SBA 7(a) loan. The SBA 7(a) loan is the SBA’s most popular loan program. If you want to take out a loan so that you can have access to working capital, purchase furniture and fixtures, make leasehold improvements, or acquire an existing business, you should consider applying for a SBA 7(a) loan.

On the other hand, if you need to finance the purchase of land or existing buildings or improvement to lands or existing buildings, purchase ground-up construction commercial real estate, or purchase heavy equipment or machinery to operate your business, you should consider the SBA 504 loan.

Under the umbrella of the 7(a) loan program is the SBAExpress loan. The advantage of the Express loan is turnaround time — completed applications will receive a response within 36 hours, a process which usually takes about one month. Express loans generally follow the same standards and uses as the 7(a) loan program.

SBA Express Loan by Celtic Bank

Celtic Bank is a nationwide small business lender specializing in SBA loans. The Celtic Bank Learn More

These are general outlines of each of the SBA loan types. If you are seriously considering pursuing the SBA 504 or SBA 7(a) loan, there are plenty of other differences and caveats associated with each. Be sure to do your homework before you move forward.

SBA Loan Eligibility, Terms, Fees & More

Now that you know the main difference between the SBA 7(a) and SBA 504 loans, let’s break each of these SBA loan types down further. The chart below offers a comprehensive look at the various characteristics of each of these SBA loans:

SBA 7(a) SBA 504
SBA Loan Amounts SBA 7(a) loans have a maximum of $5 million.

SBA Express loans have a maximum of $350,000.

SBA 504 loans have a maximum loan amount that ranges between $4 -$5 million; the loan maximum is dependent upon how the funds will be used.
SBA Loan Rates Both fixed and variable rates are available. Rates are subject to SBA maximums and are negotiated by the lender and the applicant. Rates are fixed and are typically a percentage above the US Treasury market rate for 5 and 10- year loans.
SBA Loan Terms Maturity terms for a 7(a) loan depend largely on the ability of the applicant to repay and the purpose of the loan. Below is a list of maximums based on purpose:

  • 25 years for real estate
  • 10 years for equipment
  • 7 years for working capital
Maturity terms for a 504 loan are available at 10 years and 20 years.
SBA Loan Fees Fees are based on the guaranteed dollar amount and the maturity of the loan. These fees can be rolled into the overall loan. Fees will be based on 3% of the debenture. These fees can be rolled into the overall loan.
SBA Loan Requirements & Eligibility Businesses seeking a SBA 7a loan must meet the following requirements:

  • Must be for-profit.
  • Must be located in and do business within the U.S.
  • Cannot be a business that is considered ineligible for assistance by the SBA. A full list of ineligible businesses is available on the SBA website.
  • Must have a satisfactory FICO SBSS score.
  • Must have a feasible business plan.
  • Cannot have access to alternative funds from other sources.

*For a full list of eligibly requirements please visit SBA.gov.

Businesses seeking a SBA 504 loan must meet the following requirements:

  • Must be for-profit.
  • Must be located in and do business within the U.S.
  • Cannot be a business that is considered ineligible for assistance by the SBA. A full list of ineligible businesses is available on the SBA website.
  • Must have a feasible business plan.
  • Cannot have access to alternative funds from other sources.

*For a full list of eligibly requirements please visit SBA.gov.

 

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About the Author — Lydia serves as Content Manager for Nav, which provides business owners with simple tools to build business credit and access to lending options based on their credit scores and needs.

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