Owning your business space can be a smart step if you're looking for more control and stability. Not least because property ownership often brings with it more predictable costs and the freedom to shape a space around your needs.

But making the leap from renting to buying isn’t always straightforward. Many traditional loans often require large upfront payments, and that kind of financial pressure can make purchasing feel out of reach when you're trying to keep cash flow steady.

That’s the dilemma many business owners face. Let's say you're selling furniture online, and you have outgrown your leased space. Maybe the rent’s climbing too, and your hands are tied when it comes to renovations because the landlord won't allow them.

Buying might start to look like the smarter move, but with rising expenses and tight margins, that upfront cost feels impossible to justify.

SBA loans offer a more accessible path by giving small businesses the support to invest confidently and plan for long-term growth without putting their cash flow at risk.

The two most common are the 504 loan program and the 7(a) loan program, but which suits your needs best will depend on what you're hoping to finance. So, here’s what sets them apart, and how to know which one might be right for you.

SBA 504 loans.

The SBA 504 loan is explicitly designed to help small businesses finance the purchase or improvement of major fixed assets, such as:

  • Buildings
  • Land
  • Large machinery

This program is unique because it brings together three partners:

  • Your business
  • A conventional bank or credit union
  • A Certified Development Company (CDC) (which is a nonprofit organization backed by the SBA)

Together, they share the financing:

  • The bank usually covers 50% of the loan
  • The CDC typically contributes 40%
  • Your business puts down the remaining 10% (though newer businesses or special-use properties may need to contribute a little more)

What makes the SBA 504 loan appealing.

One of the clearest advantages of the 504 loan is its lower down payment. Compared to a traditional commercial loan, the upfront costs are more manageable for many business owners. On top of that, most 504 loans come with fixed, long-term interest rates, so your monthly payments are easier to plan for.

What to consider before applying.

That said, the 504 loan isn’t built for every situation. You can’t use the funds for working capital, inventory, or to refinance debt. Also, because it involves multiple lenders, the approval process can take a bit longer and feel more complex compared to the 7(a) loan.

SBA 7(a) Loans.

If your business has a range of funding needs (not just real estate), then the SBA 7(a) loan might be a better fit because you can use it to buy or refinance commercial property, invest in equipment, cover working capital, or even acquire another business. It’s also a flexible option for making renovations or improving a leased space.

In terms of structure, the 7(a) loan allows you to borrow up to $5 million, with terms of up to 25 years for real estate. It's also worth noting that interest rates can be fixed or variable depending on the lender.

What makes the SBA 7(a) loan appealing.

This loan tends to move a little faster than the 504 process, and it’s often easier for younger businesses to qualify. The flexibility also gives you room to invest beyond property if that’s what your business needs.

What to consider before applying.

The trade-off is that variable interest rates can make your monthly costs harder to predict. Also, down payments and fees vary quite a bit between lenders, which can affect the total cost of the loan.

A note on personal risk.

When weighing up SBA 504 vs 7(a), it's worth thinking about the personal risk involved with each loan:

SBA 7(a) loans generally require a personal guarantee from anyone who owns 20% or more of the business. For larger loan amounts, lenders may secure the loan with collateral using all available business assets, and if that’s not enough, they might also require personal collateral like real estate. That can be a deal-breaker for some borrowers.

SBA 504 loans, by contrast, are usually secured by the property or equipment being financed. They typically don't involve placing a lien on your personal residence, which can be an important distinction if you're concerned about protecting your personal assets.

SBA 504 loan vs. 7(a) loan.

Both the SBA 504 loan and 7a loan are great financing solutions for small businesses, but they’re not created equal. Your particular business status and goals will dictate the ideal choice for your particular business. 

Compared to the SBA 504 loan, the SBA 7(a) loan is far more flexible. You can use it to fund real estate, working capital, inventory, supplies, equipment, and more. The SBA 504 loan, however, is fairly specific and designed to help small business owners purchase, lease, renovate, or improve commercial real estate, buildings, or equipment.

If you’re in need of working capital to purchase inventory or supplies or would like to fill cash flow gaps, for example, the SBA 7(a) loan is an excellent option. This is particularly true if you have collateral to provide and are looking for a faster application process. 

The SBA 504 loan, on the other hand, makes more sense if you’d like to finance real estate, buildings, or equipment and can prove you meet job creation, job retention, or public policy goals. You should also expect a slower application process.

Here is a direct comparison of SBA 504 loan vs. SBA 7(a) loan features, uses and requirements to help you make your decision.

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SBA 504 loanSBA 7(a) loan
Loan amountsUp to $5 million or up to $5.5 million for small manufacturers or certain energy projectsUp to $5 million
Loan usesReal estate purchase, lease, renovation, or improvement, property renovation, construction, equipment financingWorking capital, inventory, real estate, equipment, debt refinancing, and more 
Interest rateFixed interest rateFixed or variable interest rate
Repayment terms10, 20, or 25 years10 years for working capital and equipment, 25 years for real estate
Down paymentTypically 10%, but higher for startups or specific use properties Varies
Collateral Assets being financed act as collateral Collateral required for loans over $50,000
FeesSBA guarantee fees, bank fees, CDC feesSBA guarantee fees and bank fees
Eligibility Be a for-profit U.S. business
Prove a business net worth of $15 million or less, and average net income of $5 million or less
Meet job creation and retention goals or other public policy goals
A personal guarantee signed by anyone who owns more than 20%		Meet the SBA’s definition of “small business”
Be a for-profit U.S. business
Prove you’ve invested your own money in the business and explored other financing options
An unlimited personal guarantee signed by anyone who owns more than 20%

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How to choose between an SBA 7(a) vs. 504 loan.

Choosing between an SBA 504 and a 7(a) loan boils down to your specific business needs, the nature of your project, and your long-term financial strategy. If your primary goal is to secure working capital, refinance business debt, or cover operational expenses, an SBA 7(a) loan offers the flexibility and versatility to support a wide range of business purposes. Its potentially larger loan amounts and the possibility to cover soft costs make it suitable for businesses seeking a more all-encompassing financial solution.

On the other hand, if your objective is to invest in fixed assets such as real estate or heavy equipment, an SBA 504 loan could be the better choice. With its low down payment requirements, fixed interest rates, and long-term repayment options, it's designed to make sizable capital investments more affordable. Additionally, the SBA 504 loan fosters community development and encourages long-term economic growth, providing not just financial but also societal benefits.

Ultimately, the decision should be informed by a thorough analysis of your financial situation, growth forecasts, and how the loan’s terms align with your business's cash flow and investment plans. Consulting with a financial advisor or a lending specialist can provide insights tailored to your specific circumstances, enabling you to make a well-informed choice between these two SBA loan options.

Do you qualify for an SBA commercial real estate loan?

Although SBA loans make it easier for small businesses to finance commercial property, there are still key eligibility requirements to meet. In general, you'll need to:

  • Be a for-profit business based in the U.S. and operating in an eligible industry
  • Use the property as your primary place of business (at least 51% owner-occupied)
  • Demonstrate that you can repay the loan through strong financials, or if you're just getting started, a solid business plan

At this point, it's worth mentioning that lenders typically prefer businesses that have been operating for at least two years. However, that doesn't mean that newer ventures are automatically ruled out. If your plan is well-supported and you can show financial viability, you may still qualify.

You’ll also need to provide documentation as part of the application process, including recent tax returns, financial statements, and details about the property. Most lenders will also require personal guarantees from each business owner.

Business property financing that works for your organization.

So, if you want the stability of owning your long-term business premises, SBA real estate loans can help make it possible. As we've seen, the right choice depends on your goals and how you plan to grow, but no matter your path, Lendio is ready to help you move forward. Compare loan options and start your application through Lendio’s SBA loan marketplace today.