When it comes to small business loans, business owners have a wide range of options to choose from. However, this doesn’t mean it is always a straightforward process.
Whether it’s selecting a lender or deciding which type of loan best suits you, the path to financing your business dreams can be difficult as well as confusing.
One of the most popular places to seek a loan is with the SBA (The United States Small business Administration). These can be an excellent resource when finding information on different loans. The SBA is also very useful when choosing different loan programs that are exclusively available to small businesses.
The SBA offers many loans for businesses but out of all of these, the SBA 504 and SBA 7(a) programs tend to be the most popular.
Both offer unique benefits to small businesses, as long as they qualify in the first place. However, many small business owners get confused between these two loan programs. That is why we are here to clear this confusion up.
If you’re looking to purchase commercial real estate or heavy machinery or equipment for your business, then the SBA 504 is the best option. If purchasing a business from scratch or achieving working capital is your main goal, then the SBA 7(a) loan program is the best choice for you.
Read on to find out more about these loan programs so you can decide which is best for you and your business.
The SBA 7 (a) Loan Program
The SBA 7(a) loan is great for a start-up or small business owner. If you fit into this category, you may be able to obtain this loan from a bank, credit union, or other traditional lending institution.
There are criteria you need to meet in order to qualify for an SBA 7(a) loan, as with any loan. To qualify, a borrower must operate their business within the United States or the U.S. Territory. You can not be under parole when applying for this loan either. If so, it will not be granted.
If you acquire funds from the SBA 7(a) loan program, you can use them for purchasing new equipment, expanding your business to new locations, sorting out regular supply costs, repairing any damaged real estate that is linked to your business, or just about any legitimate business expense
This versatility makes the SBA 7(a) loan a very popular option for small business owners and start-ups.
The SBA 504 Loan Program
The SBA 504 loan differs from the SBA 7(a) program. 504 loans are typically used with another loan. This is so larger projects can be achieved eventually.
Most often, the borrower will put down 10 percent of the total cost of the intended project while the SBA 504 loan will cover 40 percent. The remaining 50 percent will be covered by a loan supplied by a traditional lender.
With an SBA 504 loan, the money can be used to buy a building for your business, help with building improvements, finance ground-up constructions, or purchase heavy machinery and different types of equipment.
Compared to the SBA 7(a) loan, the 504 is larger. The minimum loan amount with the SA 504 program is $125,000 while the maximum is between $5 - 5.5 million. This is at the discretion of the SBA.
The 504 has a fixed interest rate but requires a fixed 10% down payment from the borrower. If the 504 loan is for land and real estate, it has a 20-year term.
SBA 504 loans are only offered by Certified Development Companies (CDCs). This is opposed to offers from banks or other lending institutions. Across the US, there are approximately 260 CDCs.
Your local CDC office should be able to provide you with more information about a borrower’s eligibility, any down payment requirements, and anything else that is related to the SBA 504 loan program.
SBA 7(a) vs SBA 504 Loan
Both the SBA 7(a) and the SBA 504 loan programs are government-backed. They can be used for real estate and land, among many other things. The SBA 504 remains the most popular for real estate and land. This is mainly down to its regulations and details built-in that are designed specifically for such purposes.
While the SBA 7(a) loan is quite versatile, in terms of what you can finance, the SBA 504 is not as versatile. The funds tend to have specific requirements for how they are used. A borrower can not use the funds from an SBA 504 loan for working capital, unlike the 7(a) program. Above all, the funds should be used for fixed assets.
Let’s take a look at what the SBA 504 can be used for:
- Purchasing an existing building - If a business owner wants to expand into an existing location, they can use the SBA 504 funds to buy a building.
- Funding a new construction - This can include renovations that will monetize the existing building
- Acquiring land as well as improvements - The SBA has set out a list of improvements that are acceptable such as work on parking lots, street improvements, utility enhancements, and landscaping. You can contact your local SBA office for more information on these.
The specific terms and conditions of an SBA 504 loan are structured for just land and real estate use. If you need more versatility in your spending, then other loans may be the better option, such as the SBA 7(a) program.
The eligibility requirements are similar for both loans but some aspects, such as the interest rates differ. Let’s look at the differences between what you can borrow:
- Minimum - $125,00
- Maximum - $5 million
- Interest rate - Fixed
- SBA Express loans - Maximum - $350,000
- Minimum - $125,000
- Maximum - $5 to $5.5 million (dependant on the size of your project)
- Interest rate - Predominantly variable with some fixed-rate options available
Both loans must be for-profit and located within the U.S. or a U.S. Territory. A feasible business plan must also be approved and the borrower must have no access to alternative funds from any other sources.