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Can You Combine an SBA 7(a) Loan with an SBA 504 Loan?
Many borrowers appreciate the fact that SBA 7(a) loans can be used for both working capital and commercial real estate— which makes them one of the most versatile loans on the market. However, their close cousins, SBA 504 loans , which can only be used for commercial real estate, often have lower
Start Your Application and Unlock the Power of Choice$5.6M offered by a Bank$1.2M offered by a Bank$2M offered by an Agency$1.4M offered by a Credit UnionClick Here to Get Quotes!Many borrowers appreciate the fact that SBA 7(a) loans can be used for both working capital and commercial real estate— which makes them one of the most versatile loans on the market. However, their close cousins, SBA 504 loans, which can only be used for commercial real estate and other fixed assets, often have lower interest rates. 504 loans also have a slightly larger maximum loan amount, at $5.5 million (vs. $5 million for SBA 7(a) loans). So what if you could combine an SBA 7(a) loan for working capital with a SBA 504 loan for real estate? Well, you might be able to— but probably not at the exact same time.
Getting More Than One SBA Loan
There’s no specific prohibition against getting more than one SBA loan, but your loans will all have to fit within the SBA’s eligibility guidelines. Usually, this means:
Remaining within the maximum amount for that loan type
Maintaining an excellent credit score (680+ in most cases)
Ensure that your business stays within the SBA’s allowed industries and size measures
Putting up enough collateral for each loan
What are the differences between an SBA 7(a) loan and an SBA 504 loan?
The differences between the SBA 7(a) and the SBA 504 loans are primarily in how they're used. For example, the 7(a) allows you to use the funds from the loan for working capital, which you can't do with the 504. The 504 is larger, and has terms that are better suited to land and real estate projects that are large enough to be handled by multiple lenders.
The 7(a) favors start-ups and small business owners looking to work with a bank, credit union, or other traditional lending institution. Eligibility requirements for the 7(a) are straightforward, and are designed to encourage lenders to approve small business owners for projects small and large. There is no minimum loan amount for the SBA 7(a), and the loan can be used for nearly any legitimate business purpose. Some of the terms of the SBA 7(a) are based on the amount of the loan, but banks generally ask for a 10% down payment from the borrower.
The SBA 504 loan is designed for larger projects, such as land and real estate projects, and is handled by multiple lenders. The funds from the SBA 504 loan cannot be used for working capital, but can be used for purchasing new equipment, repairing damaged real estate, expanding into new locations, regular supply costs, or nearly any other legitimate business expense.
What are the advantages of combining an SBA 7(a) loan and an SBA 504 loan?
Combining an SBA 7(a) loan and an SBA 504 loan can provide a business owner with the best of both worlds. An SBA 504 loan has lower interest rates than other business loans and is available up to $5 million (or $5.5 million for small manufacturers). It is also a little less stringent in terms of borrower requirements. However, it can only be used for expansion purposes, such as buying real estate, constructing buildings, or purchasing heavy equipment. An SBA 7(a) loan, on the other hand, can be used for everything from commercial real estate to purchasing inventory to paying off other debts.
By combining the two loans, a business owner can access the funds they need for both expansion and working capital. However, it is important to note that the SBA usually does not allow more than one loan at a time to a single borrower. Additionally, the borrower must have a good credit score, their business must fit the size requirements and industries allowed for that loan, and they must have sufficient collateral to secure both loans.
For more information, please visit https://sba504.loans/sba-504-blog/combining-sba-504-loans-and-sba-7a-loans and https://www.sba7a.loans/sba-7a-loans-small-business-blog/combining-sba-7a-and-sba-504-loans.
What are the eligibility requirements for an SBA 7(a) loan and an SBA 504 loan?
The eligibility requirements for an SBA 7(a) loan and an SBA 504 loan are similar, but there are some differences. For an SBA 7(a) loan, your business must be a for-profit organization, must meet current SBA size standards, and must earn an average of $5 million or less per year (after taxes, and only for the preceding two years). Additionally, your business cannot earn 1/3 or more of its income from packaging SBA loans. You can find more information about SBA 7(a) loan eligibility requirements here.
For an SBA 504 loan, your business must also be a for-profit organization, must meet current SBA size standards, and must earn an average of $5 million or less per year (after taxes, and only for the preceding two years). Additionally, your business cannot earn 1/3 or more of its income from packaging SBA loans, and must not exceed a net worth of $15 million. Your business also cannot be engaged in any sort of passive or speculative activities. You can find more information about SBA 504 loan eligibility requirements here.
What are the maximum loan amounts for an SBA 7(a) loan and an SBA 504 loan?
What are the repayment terms for an SBA 7(a) loan and an SBA 504 loan?
The repayment terms for an SBA 7(a) loan are 10 to 15% down, interest tied to the prime rate, and a prepayment penalty of up to 3 years. The repayment terms for an SBA 504 loan are 10% down payment (except in specific instances), interest set below market rate, and a prepayment penalty up to 10 years. You can download a comparison chart from the SBA here to get a better idea.
In many cases, however, the SBA is likely to prefer that a borrower waits a bit between taking out loans, especially if the loans are larger. This helps establishes a borrower’s track record as trustworthy, reducing potential risk both the SBA and the lender. Despite that, it doesn’t hurt to try; if you have great credit and a stellar business, the SBA and your lender might be perfectly fine with you combining 7(a) and 504 loans.