SBA 504 vs 7a Comparison | SBA Commercial Real Estate Loan (2024)

FAQs

What is the difference between a 504 and 7A SBA loan? ›

Neither option is better than the other. 7(a) loans are designed for working capital, while 504 loans are designed for equipment and real estate. While SBA loan rates and the amount you can borrow differ, your business's needs will determine which program is more appropriate.

If you're looking to purchase commercial real estate or heavy machinery/equipment, the SBA 504 loan is often the best choice. If purchasing a business or getting working capital is the goal, the SBA 7A loan may be a better loan option for you.

You can use an SBA 504 loan to buy, construct or improve commercial real estate or to purchase heavy equipment. Talk to one of our SBA 504 loan experts to learn how you can take advantage of a long-term, fixed rate and low down-payment (only 10%) SBA commercial real estate loan.

It may be harder to get an SBA 504 loan than other types of SBA loans. The SBA 504 loan has unique program criteria, including a job creation/public policy goal requirement. You must also meet all the standard SBA loan requirements, including good credit and strong revenue.

It can be difficult to get an SBA 7(a) loan if you don't have strong annual revenue, a good credit score (690+) and at least two years in business. SBA 7(a) loan requirements vary from lender to lender, but you'll generally need to meet these criteria to qualify.

The SBA requires borrowers to make a 10% down payment on 7(a) loans for startup businesses and business acquisitions. For 7(a) loans used for other purposes, the individual lender may require equity if they do so for their other similar (non-SBA) loans.

The SBA has two SBA Real Estate loans that can be used for real estate: The 7(a) and the CDC/504 loan programs. The 7(a) program is a general purpose business loan that you can use for many different business reasons, including buying and repairing commercial property.

For small business owners, the rule change that allows SBA 7(a) loans to be refinanced with an SBA 504 at up to 85% of the loan value is cause for celebration.

SBA 504/CDC loans

Business owners should expect to pay a minimum down payment of 10% for an SBA 504/CDC loan, with startups typically needing to provide up to 20%. Loan amounts can go as high as $5,500,000, allowing you to finance major fixed assets, such as equipment and commercial real estate.

A 504 loan requires no collateral other than the property acquired, but conventional lenders—banks or finance companies—may ask for property in addition to what you are purchasing with the loan in order to secure it, such as your personal residence.

What percentage of SBA 504 loans are guaranteed? ›

The 504 loan is guaranteed by the SBA for up to 40 percent of the loan amount borrowed. This guarantee is much lower than the 7(a) loan that guarantees up to 85 percent of the loan. An additional portion of the 504 loan is also guaranteed by a third party, such as a bank or credit union.

This process typically takes 2-3 weeks, during which time you'll coordinate disbursem*nt timelines and finalize loan terms with the lender and the CDC. It typically takes 2-3 months to apply for an SBA 504 loan, but it can take as long as 6 months depending on your unique situation.

Combining an SBA 504 loan and an SBA 7(a) loan can provide a business owner with the best of both worlds. An SBA 504 loan has lower interest rates than other business loans, is available up to $5 million (or $5.5 million for small manufacturers), and is a little less stringent in terms of borrower requirements.

The maximum loan amount for a 7(a) loan is $5 million. Key eligibility factors are based on what the business does to receive its income, its credit history, and where the business operates. Your lender will help you figure out which type of loan is best suited for your needs.

The SBA generally doesn't offer 100 percent forgiveness on 7(a) and 504 loans, no matter how dire your finances are. However, for companies that have had to cease operations, the SBA will consider settlements that have been agreed to between a borrower and their loan issuer.

The minimum down payment required for an SBA 504 loan is 10% of the loan's total value. However, if you run a special purpose business (as listed by the SBA) or your business has not been in operation for at least two years, then you will be required to put down 15% of the loan's value.