Business Loans

Comparing The SBA 504 And 7a Loan Programs

Feb 22, 2023 • 7 min read
Female small business owner contacting the SBA
Table of Contents

      The Small Business Administration (SBA) provides attractive loan programs for small business owners. If you’re a small business in search of financing with low rates and lengthy repayment terms, SBA loans are definitely worth considering. 

      As you research the various SBA loans out there, you’ll come across SBA 504 loans and SBA 7(a) loans. Both options are guaranteed by the SBA and issued by SBA-approved lenders, such as banks, credit unions, and online lenders. So which loan makes the most sense for your unique situation? Keep reading to find out.

      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. 

      Key Differences 

      The table below outlines the key differences between the SBA 504 loan, the SBA 7(a) loan.

      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 years0 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 $25,000
      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
      A personal guarantee signed by anyone who owns more than 20%

      SBA 7(a) Loan

      The SBA 7(a) Loan is considered the SBA’s flagship program. It’s flexible in that you can use it to cover a variety of business-related expenses, such as working capital, inventory, equipment, and real estate. The SBA 7(a) comes with loan amounts of up to $5 million with repayment terms of up to 25 years. Compared to loans from traditional lenders, like banks and credit unions, the SBA 7(a) loan offers competitive interest rates that can save you hundreds or even thousands of dollars over time. 

      In most cases, the SBA 7(a) is the way to go. It’s a flexible, low-interest rate financing solution that is ideal for a number of purposes. To qualify, you must be based in the U.S. and meet the SBA’s definition of a “small business,” which depends on your industry. In addition, you’ll have to show that you’ve invested at least some of your own funds in the business and looked into other financing solutions. 

      If you go this route, be prepared to pay an SBA guarantee fee, which will ensure the government has the money to reimburse the lender if you can’t repay the loan. You may also need some type of collateral. In addition, anyone who owns 20% or more of the business will be required to sign a personal guarantee.

      SBA 504 Loan

      Formally known as the SBA 504/CDC loan, the SBA 504 loan can come in handy if you’d like to purchase fixed assets, like real estate or equipment. Its loan amounts range from $125,000 to $20 million, with terms of up to 20 years. One of the greatest perks of the SBA 504 loan is its low down payment requirements. 

      Depending on your situation, you can lock in financing for as little as 10% of the asset’s purchase price. Also, while the SBA 7(a) loan offers a fixed or variable interest rate, rates for 504 loans are always fixed and never fluctuate. This makes it easy to budget for your payments in advance and avoid unwanted financial surprises. 

      The 504 loan is less flexible than the SBA 7(a) loan, as it’s designed for business owners who want to improve fixed assets, like land, buildings, or equipment. These projects should encourage economic development or other public policy goals. A few examples of public policy goals include conserving energy or growing a minority- or women-owned business. 

      It’s important to note that the funds from a 504 loan are not for investment properties. If you plan to finance new construction, a minimum of 60% of the building must be owner-occupied once the construction is complete and only 20% of the space can be leased in the long term. 

      In most cases SBA 504 loans are self-secured so the underlying fixed assets act as collateral. 

      Also, anyone who owns 20% or more of the business must sign a personal guarantee.

      Bottom Line

      If you’re in the market for a flexible loan, the SBA 7(a) loan can check off all your boxes. As long as you meet the eligibility criteria, you may lock in a low rate and lengthy repayment term you might not find elsewhere. Plus, you’ll enjoy the peace of mind of knowing your loan is backed by the government. 

      An SBA 504 loan can help you meet your goals if you hope to grow through new or updated facilities. You may get approved with a low down payment and secure competitive interest rates and terms for commercial real estate.

      Before you choose a loan, consider the current state of your business, as well as your unique business goals and priorities. Ready to learn more about SBA loans? See if you qualify and apply for an SBA loan.

      Quickly compare loan offers from multiple lenders.

      Applying is free and won’t impact your credit.

      About the author
      Anna Baluch

      Anna Baluch is a freelance personal finance writer from Cleveland, Ohio. You can find her work on sites like The Balance, Freedom Debt Relief, LendingTree and RateGenius. Anna has an MBA in marketing from Roosevelt University.

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