What's the Difference Between an SBA 7(a) and a 504 Loan?
Both the SBA 7(a) and 504 loans are government-backed loan programs that give small business owners and lenders the opportunity to meet goals, large and small. Learn the key differences.
Thinking about the SBA 7(a) versus the SBA 504 loan for your commercial real estate project? It makes sense — both are government-backed loan programs that give small business owners and lenders the opportunity to meet goals, large and small. Each loan has a specific set of requirements and unique terms based on the amount of the loan and the type of the loan.
In general, the SBA sets loan requirements intended to minimize the risk for themselves and the lender in the case of default. The SBA loan borrower qualifications are also designed to get money in the hands of small businesses that need it.
The actual differences between the SBA 7(a) and the SBA 504 loans are mostly in application. A business owner can’t use the SBA 504 loan for a number of things that are allowed by the SBA 7(a), but the 504 is better suited for large commercial real estate projects that don’t deviate from those purposes.
Details of the SBA 7(a) Loan
Before we jump in to the SBA 504 loan, let's talk about the SBA 7(a) loan. A start-up or small business owner can obtain an SBA 7(a) loan from a bank, credit union, or other traditional lending institution. In order to qualify, the borrower must operate the business within the United States or in a U.S. Territory. Also, the business owner can’t be on parole.
The funds from the SBA 7(a) 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. The versatility of the SBA 7(a) loan makes it a very popular loan for small businesses and start-ups.
SBA 7(a) Loan Terms at a Glance
The maximum loan amount for the SBA 7(a) is $5 million, and there is no minimum. The other terms are designed to encourage lenders to approve loans for small business owners, and to enable those business owners to succeed. Here’s a look at the SBA 7(a) loan terms:
SBA 7(a) Loan Interest Rates
Maturity of less than 7 years
Maturity of more than 7 years
$25,000 or less
Base rate + 4.25%
Base rate + 4.75%
$25,001 to $50,000
Base rate + 3.25%
Base rate + 3.75%
$50,001 and up
Base rate + 2.25%
Base rate + 2.75%
SBA 7(a) Loan Amounts
No minimum, but commonly no less than $30,000
SBA 7(a) Loan Maturity
Real estate loans
Working capital or inventory
SBA 504 Loan Versus SBA 7(a) Loan
Now, let's compare the two loans. Like the SBA 7(a) loan, the SBA 504 is another government-backed loan program that business owners can use for real estate and land, among other things. The SBA 504 is very popular for land and real estate, and has details built into the program that make it designed for that purpose.
While they do allow for some versatility, it is not a defining characteristic of the SBA 504.
The funds have specific requirements for how they are used, and a borrower can’t use the funds from the SBA 504 for working capital. Primarily, the funds must be used for fixed assets. Here’s a list of what the SBA 504 can be used for:
Buying an existing building. Business owners who are expanding into an existing location can use the funds from the SBA 504 to purchase the building.
Land acquisition or improvements. The SBA lists a few improvements explicitly such as street improvements, parking lots, landscaping, and utilities -- for more information, contact your local SBA office.
New construction. Using the SBA 504 loan for new construction can include renovations that modernize existing buildings.
The specific terms of the loan are structured for land and real estate uses. Other loan programs may have better terms for your use. Learn more about different types of SBA loans here.
SBA 504 Loan Structure and Limits
The 504 is most often used with another loan so that large projects can be achieved. Generally, the borrower will supply 10 percent of the total cost of the project. The SBA 504 loan would cover 40 percent of the project, and the last 50 percent is covered by the loan from a traditional lender.
If you think about the SBA 504 vs the 7(a), the 504 is a larger loan. The minimum 504 loan amount is $125,000, and the maximum (for the CDC portion of the financing package; more on that below) is between $5 and $5.5 million, at the discretion of the SBA. The benefits for large commercial real estate is clear, as the 504 has a lower, fixed interest rate and requires a fixed 10% down from the borrower. For land and real estate, the 504 has a 25-year term.
Also, the SBA 504 loan is offered by Certified Development Companies (CDCs) rather than by banks or other lending institutions. There are about 260 CDC’s across the United States, and your local CDC office will be able to give you more information about borrower eligibility, down payment requirements, and anything else related to the SBA 504 loan.
What is a Certified Development Company (CDC)?
The SBA supports certain non-profit organizations called Certified Development Company (CDC). Working to support economic development, a CDC operates in a district set by the SBA and is regulated by the SBA. Banks and other financial institutions cooperate with CDCs on the SBA 504 loan program.
To become a CDC, a non-profit organization must petition the SBA for certification. The criteria to be considered eligible are extensive, but here are a few of the requirements set by the SBA:
Must be a non-profit organization. All businesses applying for CDC status must be non-profit corporations. Prior to 1987, the SBA certified for-profit organizations, some of which hold permanent CDC status.
Must be in good standing. The SBA lists several requirements to be considered in good standing, including being in compliance with all laws, and having satisfactory CDC Risk Rating. The SBA reserves the discretion to consider a corporation to be in good standing or not.
Cannot be an SBIC. Small Business Investment Companies (SBIC), also certified and regulated by the SBA, can’t apply for CDC status.
Cannot be affiliated. There are stipulations to this requirement, like the others, but primarily a potential CDC cannot be affiliated with an individual or other entity.
Needs a board of directors. Any corporation applying to be a CDC must have at least nine voting directors on the board of directors. They also put a limit on the number of voting directors at 25. Again, the SBA reserves the right to approve corporations with fewer or more voting directors.
Regulations govern how a CDC must operate, when they will be audited, how they must handle funds generated from the 504 loan, and many other facets of the corporation. Your local CDC office can provide more information about CDCs and certification.
How Banks Participate in SBA 504 Loans
The SBA 504/CDC loan program allows traditional lenders like banks to work with local and state CDCs to provide partial funding on fixed asset projects. The bank or other traditional lender provides a loan that typically covers 50% of the total loan cost.
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What are the eligibility requirements for an SBA 7(a) loan?
The eligibility requirements for an SBA 7(a) loan include:
- The business must meet the SBA's size standards for its particular industry.
- The business must have fewer than 500 employees and less than $7.5 million in revenue each year for the previous three years.
- The business must physically be based in the U.S. and operate within the U.S. and its territories.
- The business must operate for profit.
- Business owners must first have used other sources of financing, including personal funds, in order to qualify.
- Businesses must not be involved in lending, real estate, or speculation.
- Your business must operate for profit. Nonprofits and not-for-profit businesses are not eligible.
- You must also have some equity in the business — this could mean you already have a profitable business, or you could use your own personal equity as collateral.
- If you have any alternative financial resources, you must have used them first. For example, if you have a personal savings account or are able to get a personal loan, then you must first pursue those options before applying for an SBA 7(a) loan.
- The business owner cannot be on parole.
- You must be doing business in the U.S. or its territories.
What are the advantages of an SBA 504 loan?
The SBA 504 loan program offers several advantages to businesses in need of purchasing fixed assets. These include:
- Lower interest rates than 7(a) loans and express loans
- Lower down payment requirements than 7(a) loans and express loans
- Long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization
- Fully amortized without a balloon payment
- Terms for SBA 504 financing are typically 10, 15, or 20 years
For more information, please visit https://sba504.loans/sba-504-blog/what-is-the-sba-504-loan and https://www.sba.gov/offices/headquarters/ofa/resources/4049.
What are the differences between an SBA 7(a) loan and a 504 loan?
The SBA 7(a) loan is designed for 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 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 funds from the 504 loan cannot be used for working capital, unlike the 7(a).
What are the maximum loan amounts for an SBA 7(a) loan and a 504 loan?
The maximum loan amount for an SBA 7(a) loan is $5 million, and there is no minimum. The maximum loan amount for an SBA 504 loan is $5.5 million.
What are the repayment terms for an SBA 7(a) loan and a 504 loan?
The repayment terms for an SBA 7(a) loan are a maximum of $5 million with 10 to 15% down, interest tied to the prime rate, and a prepayment penalty of up to 3 years. The repayment terms for a 504 loan are a maximum of $5 million, or $5.5 million for small manufacturers, 10% down payment except in specific instances, interest set below market rate, a guarantee up to 90%, and a prepayment penalty up to 10 years. You can download a comparison chart from the SBA here to get a better idea.