How Does the SBA 504 Loan Compare to a 7(a) Loan and Other Loans Available?

Making an informed decision for your business funding needs is essential, but it can be difficult given the number of different financial tools available. One of the most popular small business loans on the market is the SBA 7(a) loan. How does it compare to the SBA 504 loan program?

SBA 504 Loans vs. SBA 7(a) Loans

You’ll find a number of similarities between 7(a) loans and 504 loans, but they are not the same. 7(a) loans:

  • Have a $5 million maximum

  • Require 10 to 15% down

  • Interest tied to the prime rate

  • Are guaranteed to 85% for loans under $150,000, and 75% for those over $150,000, up to $3.75 maximum guarantee

  • Can be used for almost anything, including working capital and inventory

  • Are available in many formats. 5 and 10-year maturity rates are used for working capital and equipment, and 25 years for real estate.

  • Have no SBA fees if they are under $150,000 but incur graduated fees on amounts higher than $150,000

  • Standard business eligibility requirements

  • Have a prepayment penalty of up to 3 years

In contrast, 504 loans:

  • Permit loan amounts of up to $5 million, or $5.5 million for small manufacturers

  • Require a 10% down payment except in specific instances (young startup and special-use real estate)

  • Interest set below market rate

  • Are guaranteed up to 90%

  • Have stringent use requirements, and are designed primary for the purchase of fixed assets, such as real estate or machinery

  • Have 10, 20 and 25 year terms

  • Have lower fees than 7(a) loans for amounts over $150,000

  • Have more stringent business eligibility requirements

  • Have a prepayment penalty up to 10 years

Not sure if you are best served by a 504 loan or a 7(a) loan? You can download a comparison chart from the SBA here to get a better idea.

What Other Loan Options Are Available?

There are numerous other loans available from the SBA and from other sources. You’re not limited to just 504 loans or 7(a) loans. Understanding the various options can help you make a more informed decision for your business growth.

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7(a) Small Loans: This program is designed for businesses with smaller financial needs, generally maxing out at $350,000. With that being said, other than the maximum amount, most of the other details are the same as the standard 7(a) loan. However, note that the SBA does score your credit on this loan.

SBA Express: The SBA Express loan program offers up to $350,000 in funds but only guarantees 50% of that amount. Generally, these funds are used as revolving lines of credit, but they can also be used as a term loan. The interest rate is tied to the prime rate, plus 6.5% for loans under $50,000 or 4.5% for loans over $50,000.

SBA Veterans Advantage: This program is designed specifically for veterans, and the loans are almost identical to SBA Express when the amount financed is $350,000 or less. Loans max out at $5 million, and are treated as 7(a) loans if over $350,000.

CapLines: There are four programs on offer here, including working capital, contract, seasonal, and builders. The maximum amount is $5 million, and the terms vary depending on which program is in question.

Community Advantage: Available up to $250,000 these loans are available through mission-focused lenders only. Most of the terms are the same as 7(a) loans, but the interest will be tied to the prime rate, plus 6%.

International Trade: This program offers up to $5 million in funding and a 90% guarantee up to $4.5 million, or $4 million if used for working capital. The loan is available for 7(a) qualifying companies engaged in or preparing to enter international trade.

Export Working Capital Program: With a cap of $5 million, this loan comes with a 90% guarantee up to $4.5 million. It is designed for working capital, and maxes out with a three-year term.

Export Express: This loan program is similar to SBA Express, but it is tailored to the needs of exporters. It has a cap of $500,000 with varying guarantee rates. Note that applicants must be able to prove that the loan will “enable them to enter a new, or expand in an existing export market”.

Non-7(a) Microloans: Designed for businesses that need smaller amounts of capital, these loans max out at $50,000 and are not guaranteed by the SBA. This means that the borrower will need to provide collateral. They have the same requirements as 7(a) loans.

You can find the full comparison chart through the SBA’s website as a PDF file here.