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. 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 million7(a) Small Loan: Maximum loan amount of $350,000SBA Express: Quick turnaround time, application response within 36 hoursExport 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 capitalInternational 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
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
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.
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.
