SBA 504 vs. 7(a) Loan: What's the Difference?

Decide if the SBA’s 504 or 7(a) loan is better for your business

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If you’re a small business owner, chances are you’ve probably looked into funding options available through the Small Business Administration (SBA). The SBA’s 504 and 7(a) loans are two of its most common loan programs. We’ll discuss the similarities and differences between the two and how to decide which one is right for your business.

What’s the Difference Between SBA 504 and 7(a) Loans? 

Here are some key differences between 504 and 7(a) loans including their uses, how to qualify for them, maximum loan amounts, and more.

  SBA 504 Loans SBA 7(a) Loans
Uses for loan  -Buying or building of structures or land, new facilities, long-term machinery, and equipment. -Upgrading or bettering lands, streets, parking lots, landscaping, existing facilities, etc. -Buying real estate. -Construction and renovation of buildings. -Working capital (both short- and long-term). -Refinancing of current business debt. -Buying equipment, machinery, furniture, fixtures, etc. -Opening, acquiring, running, or expanding a company. -Revolving funds dependent upon the value of inventory and receivables. 
Eligibility requirements  -Be located in the U.S. or its territories and operate as a  for-profit business.  -Net worth below $15 million. -Average net income below $5 million after federal income taxes for two years before the application. -Must comply with SBA size guidelines, have management experience, a sound business plan, be in good standing, and have the ability to meet loan repayments.  -Be a for-profit business and be located in the U.S. or its territories. -Fit the SBA’s definition of small business. -Have invested equity. -Have used other financial resources such as personal assets, in advance to applying for aid. -Can show a need for the loan. -Finances must be for sound business use. -No delinquent existing debt obligations with the U.S. government.
Maximum loan amount Up to $5 million Up to $5 million, depending on loan type.
Interest rate Attached to an increment higher than current market rate for 5- and 10-year U.S. Treasury issues. Rates total about 3% of the debt Negotiated between lenders and borrowers, but must abide by SBA limits (there is no SBA maximum on the Export Working Capital Loan)
Turnaround time  Unspecified turnaround time 5-10 business days (SBA Express Loans have an application response time of 36 hours, and for Export Express Loans, it’s 24 hours)
Repayment terms Loans have 10-, 20-, and 25-year maturity terms -Loans are typically repaid on a monthly basis, payments include principal and interest. -Fixed-rate loans have a constant interest rate, so payments don’t change. -Amounts on variable rate loans can fluctuate as the interest rate changes.

Which Is Right for Your Business?

Basics of 504 Loans

If you’re interested in applying for a 504 loan, your first stop should be to visit your local certified development company (CDC). A 504 loan is exclusively available through CDCs, which are community-based partners with the SBA.  

A 504 loan is fixed-rate, long-term financing that can, for example, be used to fund the purchase of major fixed assets such as building structures, land, machinery, or equipment. The finances are unable to be used for working capital or inventory, debt consolidation, repayment, or refinancing, or rental real estate investment or speculation. 

7(a) Loan Essentials

According to the SBA, 7(a) is the agency’s most common loan program. The terms and conditions for loans vary depending on the loan program—it offers several different types of loans under the 7(a) umbrella:

  • Standard 7(a): Maximum loan amount of $5 million
  • 7(a) Small Loan: Maximum loan amount of $350,000
  • SBA Express: Quick turnaround time, application response within 36 hours
  • Export Express: Gives exporters and lenders an easier way to get SBA-backed funding for loans and lines of credit 
  • Export Working Capital: Intended to support businesses with export sales by providing working capital
  • International Trade: Long-term finances for companies that are expanding due to increased export sales, or that need to make updates to compete with foreign businesses 
  • Preferred Lenders: Select lenders can process, close, service, and liquidate the loans guaranteed by the SBA.
  • Veterans Advantage: Loans for veteran-owned small businesses have reduced fees.
  • CAPLines: Intended to aid businesses in meeting short-term and cyclical working capital needs 

The SBA doesn’t lend the money itself, but instead works to pair borrowers with lenders. The SBA partners with various lenders to set guidelines for loans and decrease their risk while making it easier for small businesses to find funding.

Tips To Help You Choose

When deciding whether the 504 or 7(a) loan is a better pick for your business, ask yourself how much financial support you’re looking for, what you plan on using the funds for, what the financial standing of your business is, and what your time frame for funding looks like.

If you’re looking for longer-term, fixed-rate funding to help create jobs and grow your business, then the 504 loan is likely your best bet. These loans are intended for use by businesses that are buying, building, or improving structures, land, streets, utilities, parking lots, landscaping, or facilities, as well as investing in significant machinery and equipment. However, the 504 loan has restrictions regarding use of the funds. You should not apply for the 504 loan if you’re seeking any of the following: 

  • A loan for working capital or inventory
  • Funds for debt consolidation, repayment, or refinancing
  • Finances to use toward rental real estate speculation or investment

A loan calculator can help you to estimate your payments and figure out which loan is the best fit for your business.

The SBA’s 7(a) loan program, meanwhile, can be a good option for small businesses looking for a shorter time to funding. The SBA Express Loan, for instance, offers an application response time of 36 hours. The 7(a) program also offers various options catered toward particular business needs. For example, if you’re a veteran, or are involved in international trade, you can take advantage of specific loans that are appropriate for your business. 

A 7(a) loan is best for businesses who are looking to fund working capital, seeking revolving funds, or wanting to refinance business debt. The loans can also be a good option for establishing, acquiring, maintaining, or expanding a business. Companies that want to construct or renovate buildings, or buy real estate, land, structures, equipment, machinery, supplies, and more, can also take advantage of the 7(a) loan program.

Frequently Asked Questions (FAQs)

How much equity do you need for an SBA loan?

The SBA states that businesses must have reasonable invested equity in order to be eligible for loans. The business owner must have made investments of their own resources into the business through means such as time or money. 

How do you refinance an SBA 7(a) loan?

In order to refinance an SBA 7(a) loan, businesses must meet requirements such as:

  • The original loan use must have met SBA eligibility.
  • The loan proposal must give the borrower a significant benefit, including a payment amount of at least 10% lower than the current loan.
  • Written explanation for the loans, and explanation regarding why the current loan doesn’t meet reasonable terms. 

What are the maximum terms for SBA 504 and 7(a) loans?

SBA 504 loans have 10-year, 20-year, and 25-year maturity terms available. SBA 7(a) loans have maximum maturity terms of 25 years for real estate and 10 years for equipment, working capital, or inventory loans.

What is the minimum credit score you need to get an SBA loan?

While the SBA uses credit history to determine eligibility for businesses seeking loans, even businesses with bad credit have the potential to qualify for startup funding.