sba 504 vs 7(a)
SBA 504 vs 7(a) Loan Comparison:
What Are the Differences?
Compare SBA 504 vs 7(a) loans side by side, with analysis including how to choose which loa is best for you.
SBA 504 loans and SBA 7(a) loans are both types of business loans that are guaranteed by the U.S. Small Business Administration (SBA). The loan amounts, terms and permissible uses vary for each of these programs.
SBA 504 loans vs. SBA 7(a) loans: Key differences
SBA 504 Loan | SBA 7(a) Loan | ||
Loan Amounts | Up to $5 million, $5.5 million for small manufacturers or specific energy projects. | Up to $5 million. | |
Permissible uses | Construction, real estate purchase, property renovation, equipment financing. | A wide variety of uses, including working capital, expanding your business, acquiring another business, real estate purchase, property renovation, equipment financing or debt refinancing. | |
Maximum repayment terms | 10, 20, or 25 years. | 10 years for working capital and equipment. 25 years for real estate. | |
Interest rate | Fixed interest rate pegged to U.S. Treasury bonds. | Fixed or variable interest rate, based on the prime rate plus a lender spread. | |
Fees | SBA guarantee fee, GCC fees and bank fees. | SBA guarantee fee and bank fees. | |
Down payment requirements | 10%, but higher for startups or properties with a specific use | Varies | |
Eligibility | * Have a business net worth of $15 million or less, and an average net income of $5 million or less.
* Project must meet job creation and retention goals.
* Be a for-profit business in the U.S or U.S. territories. | * Meet the SBA's definition of "small".
* Be a for-profit business in the U.S. or U.S. territories.
* Must have invested your own money in the business and attempted to use alternative financinal resourses. |
While there are some grey areas, it's usually quite clear which loan - the SBA 504 or the 7(a) - is right for a small business.
SBA 7(a) loan structure
The SBA itself is not in the business of lending. Rater, the SBA partially gurantees business loans made by banks and other private SBA lenders. The partial guarantee lowers a lender's risk of extending capital to small business owners and incentives lenders to approve applicants that they might otherwise reject. A bank or other direct lender will underwrite and issue your SBA 7(a) loan.
SBA 7(a) loan uses
Along with the above uses, any of the following are also eligible uses for an SBA 7(a) loan:
* Purchasing, construction or renovating a commercial property (most investment property is excluded, however).
* Acquiring fixed assets, such as equipment, fixtures, or furniture.
* Working capital, such as purchasing inventory or supplies.
* Purchasing land for a business.
SBA 7(a) loan eligibility
The bank issuing the 7(a) loans has the discretion to set its own eligibility criteria. In most cases, SBA lenders require a strong personal credit score (650+) and a demonstration of your ability to repay the loan, evidenced by historical business revenue or documented cash flow projections. They'll also require a down payment of 10% to 20%.
SBA 7(a) loan amounts and terms
There's technically no minimum loan amount set by the SBA, but obtaining loan amounts at the very loan end of this spectrum can be hard because lender's don't earn much profit from small loans.
SBA 7(a) loan interest rates and fees
The typical SBA 7(a) loan has a variable interest rate and monthly payments of principal and interest. The latest SBA loan rates always represent a spread over the Prime Rate, which is a market rate that fluctuates based on how the economy is doing. SBA 7(a) loan rates are similar to the rates on conventional bank loans and represent some of the most affordable options for small businesses. That said, since the interest rate is variable, rates can go up or down while your loan is outstanding.
The primary fee on an SBA 7(a) loan is the SBA guarantee fee. The SBA charges the guarantee fee to ensure that the government has money to reimburse the lender if the business can't pay back the loan.
Currently, the SBA guarantee fee is as follows:
* Loans of $150,000 or less: 2% on the guaranteed portion.
* Loans of $150,001 to $700,000: 3% fee on the guaranteed portion.
* Loans of $700,001 to $5 million: 3.5% fee on the guaranteed portion, on amounts up to $1 million, plus 3.75% fee on the guaranteed portion over $1 million.
Note that this fee is charged on the guaranteed portion of the loan. For example, if you get a $150,000 loan, the SBA will guarantee up to 85% of that loan - or $127,500. That means you'll owe a guarantee fee of 2% on that latter amount - or $2,550. There's also a small service fee that you have to pay annually.
Keep in mind that your bank will likely chare additional fees, such as loan packaging fees and closing fees. Such fees will increase your overall borrowing cost.
SBA 7(a) loan collateral
Most SBA 7(a) loans require collateral of some sort. For larger loans, the SBA requires the lender to place a lien on all assets that are being financed.
If the loan isn't fully secured at that point, the bank might also place a lien on the business owner's personal residence or other personal property.
In addition to collateral, anyone who owns 20% or more of the business must sign a personal guarantee. By signing a personal guarantee, you are making a personal promise to pay back the loan if your business's assets don't sufficiently compensate the lender.
SBA 504 loan: Best for financing fixed business assets
The SBA 504 loan, more formally call an SBA 504/CDC loan, is a more specialized loan than the 7(a) loan. The 504 loan is designed for business owners who need to finance the acquisition or improvement of fixed assets - such as land, buildings, or equipment - whose projects promote economic development or other public policy goals.
SBA 504 loan structure
The SBA 504 loan has a more complicatec structure than the SBA 7(a) loan, comprising of three parts.
* Bank loan (50%): A bank or other direct lender extends 50% of the loan amount.
* CDC loan (40%): An SBA - approved Certified Development Company (CDC) extends 40% of the loan amount.
* Borrower down payment (10%): The borrower puts up 10% of the loan as a down payment.
Owners of startups and special use properties must put up higher down payments. CDCs are local nonprofit lenders that promote economic development in their communities by participating in SBA 504 financing. The SBA certifies and regulates CDCs.
SBA 504 loan uses
The funds from a 504 loan can only be used for properties that are at least 51% owner-occupied (for existing facilities: 60% for new construction). In other words, contrast to an SBA 7(a) loan, an SBA 504 loan cannot be used for working capital or for buying inventory or supplies.
SBA 504 loan eligibility
The job creation/retention or public policy requirement is unique to the SBA 504 loan program. For every $75,000 that the CDC lends, the applicant business must create or retain at least one job (small manufacturers have to meet a higher job creation/retention goal). Three-quarters of the jobs created or retained must be in the local community. If you're not able to show that you meet the job creation or retention requirements, there are other public policy goals that you can meet instead, such as furthering the growth of minority or women-owned businesses or reducing energy consumption.
The typical business owner has to put just 10% down on an SBA 504 loan. However, if you haver a startup (fewer than two years of consecutive operating history) or a special use property (such as an amusement park or gas station), you'll have to put down 15%. If your business is classified as a startup and a special use property, the down payment increases to 20%.
On top of the requirements detailed above, the bank and the CDC issuing the laon can set additional requirements. As with 7(a) loans, SBA 504 lenders require strong personal credit and a demonstration of your ability to repay the loan, evidenced by historical business revenue or documented cash flow projections.
SBA 504 loan amounts and terms
The SBA 504 loan is ideal for large business investments. There's no limit on the bank portion of the laon, so 504 loans technically have been funded for upward of $20 milllion.
Your repayment term on an SBA 504 loan will be 10, 20 or 25 years. If financing equipment, the term depends on the expected useful life of the equipment.The term wil be 20 or 25 years for other uses, so you can expect low monthly payments.
Choose the SBA 504 loan if:
- You need financing to purchase, lease, renovate, or improve commercial real estate, buildings, or equipment.
- You're making a larger investment in your business.
- You're able to show that you meet job creation, job retention, or public policy goals.
- You're okay with a slower loan application process.
- You can only afford a 10% down payment.