SBA 504 vs. 7A: What is best for you?

Choosing the right small business loan isn’t easy. See how Alloy Commercial Capital can help.

Quick Background on SBA

How to choose between a 7(a) or 504 loan

If a business owner is seeking working capital or financing leasehold improvements as a borrower, SBA 7a Loans funds that can be used for these items. However, if the financing involves buying a building, ground-up construction, building renovation, or the purchase of heavy machinery and equipment, then the borrower should consider an SBA 504 Loan to attain the maximum loan with fixed rate options.

The SBA 504 loan was designed as an economic development program for small businesses to finance commercial real estate for use in existing business operations through local certified development companies. The thought was that if business owners could acquire real estate with a low down payment and a fixed rate, it would allow them to grow their businesses. Meanwhile, the SBA 7(a) loan was originally designed for higher-risk loans; like the acquisition of a business, working capital, refinancing current business debt, furniture and fixtures, and leasehold improvements. Such loans are considered to be high risk because of very weak, limited, or even no collateral.

While the SBA 7a loan can be used for real estate purposes, this facility is often structured with a variable rate and may not provide the same cash flow savings and rate protection as the SBA 504 Loan. Be sure to ask your lender about SBA 504 Loans if your project contains real estate or heavy equipment.

Benefits of the 504 Loan

The SBA 504 Loan Program offers borrowers a fixed rate for up to 25 years with a minimum down payment of 10%. Existing equity in the real estate can be considered towards the down payment when applicable. Additionally, SBA Guarantee Fees on the 7a loan vary based on the size of the project. However, with the SBA 504 loan, the fees involved stay flat as a percentage when the loan amount increases.

In regards to interest rates, the 7(a) loan typically has a variable rate. While such rates are historically low now, they are currently rising and will continue to do so making it a more expensive proposition. Some banks do offer fixed 7(a) interest rates for any term.

In addition, the 7(a) loan has the “All Collateral Available Test.” This is where a small business borrower typically must pledge all collateral available, including their personal residence, when there is a collateral shortfall. This test does not exist with a 504 loan.

From the perspective of a small business owner, the SBA 504 loan can be safer and better for the borrower’s bottom line, and can be an important tool for the growth of small businesses.

Frequently Asked Questions

Answers to the most common questions

SBA 7a loans are designed for higher-risk loans such as business acquisition, leasehold improvements, and working capital. SBA 504 loans are designed for small business to to finance commercial real estate.
An SBA 7a loan is a small business loan partially guaranteed by the Small Business Administration. SBA 7a loans are typically used to garner working capital or financing leasehold improvements.
To qualify for an SBA 7a loan, your business must be based in the United States and in an SBA-eligible industry. Your small business must have less than $7.5 in average revenue for the past three years, net income under $5 million, fewer than 500 employees, and tangible net worth less than $15 million.
The maximum SBA 7a loan amount is $5 million. SBA Express loans have a maximum loan amount of $350,000.

Call one of our expert loan officers a at 513-631-8292 for more information

Talk to one of our loan experts today to find the right solution for your needs

Or give one of our expert loan officers a call at 513-631-8292 for more info.

“Alloy walked me through the SBA 504 loan process every step of the way, which I really needed since I had never purchased commercial real estate before. They also helped me out with a tricky leased land situation that helped pave the way for future commercial real estate purchases.”
Steve Dorgan
President, Wray Precision, SBA 504 Loan Borrower