SBA 504 versus 7a Loan: What’s the best-fit loan for your small business?

Only 48 percent of small businesses overall have their financing needs met, according to a 2019 Small Business Credit Report. Are you among the more than half of small businesses still lacking the capital needed to succeed or scale to the next level?

If so, it’s important to know your options. The Small Business Administration offers multiple programs by working with banks and lenders to assist small businesses. Two of the most popular of these loan programs are the SBA 504 and the 7a loan.

When considering a business loan, it’s critical to understand and compare the differences — both obvious and nuanced — to choose which is the right fit for your business.

3 Key Differences between SBA 504 vs 7a loans

There are three key differences between these two popular loans types to consider when looking at your loan options:

1. Purpose of the loan: Is your business an existing business or a new venture?

The first consideration when comparing SBA 504 and 7a loans is the status of your business and the purpose of your loan. If you have an existing business that is looking to purchase commercial real estate, land or commercial equipment, the SBA 504 loan could be the better choice for your business.

If you are a new business or trying to purchase an existing business, the 7a loan may be more appropriate. 7a loans are also used for companies that need to purchase inventory or just need some working capital. 

2. Loan amount: How much money is your company looking to borrow?

SBA 504 loans are typically larger loans in dollar amounts lent. Businesses can borrow from $125,000 up to $10 million, depending on the business’s qualifications and needs.

7a loans, meanwhile, offer smaller dollar amounts, with the maximum loan topping off at $5 million dollars. Although there is technically no minimum amount with a 7a loan, these loans typically start near $30,000 dollars. 

3. Terms: What are the interest rates, collateral and time invested in a loan?

The terms for SBA 504 loans compared against 7a loans is another factor that differentiates these two loans. Terms include interest rates, down payments, collateral and length of the loans.

SBA 504 loans tend to have fixed interest rates that are fully amortized for the length of the loan. The length of the loans tends to be 20 years for real estate and 10 years for equipment loans. Owners are expected to put down a 10 percent deposit, as well as offer collateral through project assets that are being financed and personal guarantees.

Conversely, 7a loans are generally variable-rate loans and can include loan guarantees. Guaranty amounts are based on the amount of the loan and fluctuate. The lower the loan amount, the higher the guaranteed percentage. Loan lengths also vary: length is up to 25 years on real estate, and 10 years on equipment and working capital. Some real estate transactions do not require a down payment, although the Small Business Administration does require a 10 percent down payment for new businesses.

It’s important to note that collateral for 7a loans is different in that a business owner may have to offer any and all collateral they have available to help secure the loan.

Get More Information on the Right Small Business Loan for You

Knowing the differences between these popular small business loan offerings can help you secure the capital you need to achieve your business goals.

To learn more about the SBA 504 and 7a loan options, and what you need to do to prepare for your loan appointment should you move to the next step, contact your local certified development company.

Ready to discuss your loan options further? Talk to the experts at Certified Development Company (CDC) Growth Capital. We can help answer any questions you might have, and get you on track to building your business with the most beneficial SBA loan for your company’s growth needs. Contact our loan experts today at (216) 592-2332 or online.