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

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

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Small business owners have a lot of options to consider when it comes to small business loans. 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 United States Small Business Administration (SBA) can be a great resource for information on loans, and specifically, different SBA loan programs that are exclusively available to small businesses.

Of those SBA loan programs, the SBA 504 and the SBA 7(a) programs are two of the most popular. Each offers unique benefits to businesses that qualify.

SBA 7(a) Loan and SBA 504 Loan Overview

Both the 7(a) and 504 loans 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, make improvements to existing facilities, purchase equipment, or purchase ground-up construction commercial real estate, you should consider the SBA 504 loan. The 504 program is an economic development program aimed at promoting growth and job creation, thus there may be a job creation requirement that is dependent on the amount of funds received.

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 weeks to months. 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

It’s worth noting that these SBA loan types are not offered directly through the SBA. Instead, the SBA works with financial institutions like banks, credit unions, and other business lenders. These Preferred SBA lenders then offer SBA loans that are guaranteed by the Small Business Administration—meaning if the borrower defaults, the SBA will cover the cost, mitigating the risk to lend for these Preferred SBA lenders.

SBA 504 loans are made available through Certified Development Companies (CDCs).

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 more 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 of $5 million; your loan maximum is dependent on the size of the project.
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.

Is an SBA Loan right for your business?

SBA loans offer some of the lowest rates on business financing, however that doesn’t mean this is a perfect option for your company. You’ll have to meet the above requirements, and you also must have tried to use other financial resources, like personal assets, to qualify.

If you’re a brand new company, consider seeking out other startup loan options and building your business credit before going through the lengthy application process associated with getting an SBA loan. There’s a BusinessLauncher tool in your free Nav account that can help you get started with business credit and make your company more legit in the eyes of SBA lenders.

This article was written in October, 2015 and updated in May of 2018.

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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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