Can You Combine an SBA 504 Loan and an SBA 7(a) Loan?
There are compelling reasons for a business owner to consider taking out an SBA 504 loan. They have lower interest rates than other business loans and are somewhat less stringent in terms of borrower requirements, too. In comparison, the SBA 7(a) loan is the most popular business loan offered by tBetter Financing Starts with More Options$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1M offered by a Credit Union at 5.1%Click Here to Get Quotes
Combining SBA 504 Loan and SBA 7(a) Loans: The Basics
There are compelling reasons for a business owner to consider taking out an SBA 504 loan. They have lower interest rates than other business loans. They’re available up to $5 million (or $5.5 million for small manufacturers). They are a little less stringent in terms of borrower requirements, too.
However, there are shortcomings here. For instance, perhaps the single largest downside to a 504 loan is its rigidity – it can only be used for expansion purposes, such as buying real estate, constructing buildings, or purchasing heavy equipment and the like. The funds from this loan cannot be used as working capital, or for many other needs. That’s where the SBA 7(a) loan comes into play. This is the most popular business loan offered by the Small Business Administration, and can be used for everything from commercial real estate to purchasing inventory to paying off other debts.
Can you use both, though? Is it possible to have the best of both worlds? It might be possible, but it will not be easy to take out more than one SBA loan. Even if the SBA chose to allow it (and there is actually no rule against it), you will need to ensure that you have a good credit score, that your business fits the size requirements and industries allowed for that loan, and that you have sufficient collateral to secure both loans.
Usually, the SBA does not allow more than one loan at a time to a single borrower. And, there are good reasons to get one loan at a time. By getting a loan and then paying it off, you establish stability and credit history. You show that your business is less risky than others, meaning that lenders are more willing to work with you.
However, you can always approach a lender and/or CDC about combining the two loans. Just make sure that you have enough collateral, or that the SBA will approve the use of the same collateral to secure two loans (this is rare, but not completely unheard of).
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What are the differences between an SBA 504 loan and an SBA 7(a) loan?
The differences between the SBA 7(a) and the SBA 504 loans are primarily in how they're used. For example, the 7(a) allows you to use the funds from the loan for working capital, which you can't do with the 504. The 504 is larger, and has terms that are better suited to land and real estate projects that are large enough to be handled by multiple lenders.
The 7(a) favors start-ups and small business owners looking to work with a bank, credit union, or other traditional lending institution. Eligibility requirements for the 7(a) are straightforward, and are designed to encourage lenders to approve small business owners for projects small and large. There is no minimum loan amount for the SBA 7(a), and the loan can be used for nearly any legitimate business purpose. Some of the terms of the SBA 7(a) are based on the amount of the loan, but banks generally ask for a 10% down payment from the borrower.
Before we jump in to the SBA 504 loan, let's talk about the SBA 7(a) loan. A start-up or small business owner can obtain an SBA 7(a) loan from a bank, credit union, or other traditional lending institution. In order to qualify, the borrower must operate the business within the United States or in a U.S. Territory. Also, the business owner can’t be on parole.
The funds from the SBA 7(a) can be used for purchasing new equipment, repairing damaged real estate, expanding into new locations, regular supply costs, or nearly any other legitimate business expense. The versatility of the SBA 7(a) loan makes it a very popular loan for small businesses and start-ups.
What are the advantages of combining an SBA 504 loan and an SBA 7(a) loan?
Combining an SBA 504 loan and an SBA 7(a) loan can provide a business owner with the best of both worlds. An SBA 504 loan has lower interest rates than other business loans, is available up to $5 million (or $5.5 million for small manufacturers), and is a little less stringent in terms of borrower requirements. An SBA 7(a) loan is the most popular business loan offered by the Small Business Administration and can be used for everything from commercial real estate to purchasing inventory to paying off other debts.
The advantages of combining an SBA 504 loan and an SBA 7(a) loan include:
- Lower interest rates than other business loans
- Available up to $5 million (or $5.5 million for small manufacturers)
- Less stringent in terms of borrower requirements
- Can be used for commercial real estate, purchasing inventory, and paying off other debts
What are the eligibility requirements for an SBA 504 loan?
In order to take out an SBA 504 loan, your business must meet the following eligibility requirements:
- Your business must be a for-profit organization.
- Your business must meet current SBA size standards.
- Your business’ net worth cannot exceed $15 million.
- Your business cannot earn 1/3 or more of its income from packaging SBA loans.
- Your business must earn an average of $5 million or less per year (after taxes, and only for the preceding two years).
- Your business cannot be engaged in any sort of passive or speculative activities.
Note that additional requirements may be placed by CDCs or conventional lenders. You can find a full list of eligibility requirements and other important information with the SBA here.
What are the eligibility requirements for an SBA 7(a) loan?
The eligibility requirements for an SBA 7(a) loan include:
- The business must meet the SBA's size standards for its particular industry.
- The business must have fewer than 500 employees and less than $7.5 million in revenue each year for the previous three years.
- The business must physically be based in the U.S. and operate within the U.S. and its territories.
- The business must operate for profit.
- Business owners must first have used other sources of financing, including personal funds, in order to qualify.
- Businesses must not be involved in lending, real estate, or speculation.
- Your business must operate for profit. Nonprofits and not-for-profit businesses are not eligible.
- You must also have some equity in the business — this could mean you already have a profitable business, or you could use your own personal equity as collateral.
- If you have any alternative financial resources, you must have used them first. For example, if you have a personal savings account or are able to get a personal loan, then you must first pursue those options before applying for an SBA 7(a) loan.
- The business owner cannot be on parole.
- You must be doing business in the U.S. or its territories.
What are the maximum loan amounts for an SBA 504 loan and an SBA 7(a) loan?
The maximum loan amount for an SBA 7(a) loan is currently set at $5 million in lifetime dollars. For an SBA 504 loan, the maximum loan amount is also currently set at $5 million in lifetime dollars. However, if your business is a small manufacturer, you can borrow up to $5.5 million in lifetime dollars. Additionally, if you decide to embark on energy-related projects that fall under the “go green” heading, you can borrow up to $16.5 million in lifetime dollars.