Differences Between An SBA(7a) Loan & An SBA 504 Loan
The U.S. federal Small Business Administration (SBA) offers a loan program to borrowers for major fixed assets for the purpose of establishing businesses or promoting job growth. The SBA partners with Certified Development Companies (CDCs) who then work with the providers (typically approved banks) and oversee the loans.
The most common loan programs are the SBA(7a) and SBA 504 lending agreements. When shopping for a business loan from a bank, most borrowers are usually directed to the SBA(7a) program for the financing of a commercial business, or for working capital to cover operating expenses. The SBA 504 program is another government lending option for business borrowers seeking finance for major purchases such as commercial real estate or heavy equipment. When preparing to apply for a business loan, review the differences between SBA (7a) and SBA 504 loan financing to determine which product is best for you.
The SBA(7a) Loan Program
The SBA(7a) loan program is designed to increase business investment growth. Set up by the federal government to encourage higher-risk transactions, the SBA(7a) loan program can be used to finance the acquisition of a business or to inject more liquidity into operations. A viable source of working capital for any new or existing business with a future, the SBA(7a) is often used for major “property, plant & equipment” purchases.
An SBA(7a) loan can be applied to a real estate purchase, but the SBA guarantee and SBA fees are more expensive than they are for SBA(7a) loan agreements. It is important to keep in mind banks are prohibited from financing loan fees with loan proceeds according to federal law.
If buying a commercial business is the stated reason for loan application, a real estate transaction can be covered by SBA(7a) financing. This loan program can also be used for refinance business debt. The maximum loan amount provided to SBA(7a) program borrowers is $5 million.
The SBA typically assigns an adjustable interest rate to SBA(7a) agreements based on the prime interest rate. SBA(7a) borrowers have the advantage of a large loan, with a standard repayment, installment plan schedule amortized for up to 25 years. The potential downside is that the SBA(7a) loan program generally requires borrowers to have 90% of the principal amount of the financing agreement in collateral.
The SBA (504) Loan Program
The federal SBA 504 loan program was designed to meet the financing needs of small businesses. To this end, the 504 loan program finances commercial real estate transactions and large equipment purchases for business operations. SBA 504 loan finance can also be used to offset building construction and renovation costs, and ranges from $125,000 to $20 million.
SBA 504 loans are uncollateralized financing agreements, not requiring a borrower to provide evidence of asset value equal to the proportional amount of the loan. The SBA assigns fixed interest rates to all 504 loans, amortized for up to 25 years. The SBA assigns lower fees to its 504 loan program agreements than its SBA(7a) loan program agreements.
An SBA 504 loan can be applied to commercial real estate financing of existing owner-occupied properties. The borrower must have 10% of the full value of the purchase price in downpayment to qualify for SBA 504 loan financing for owner-occupied, real estate purchase. Partnerships with varying assets and equity per owner will find an SBA 504 loan the most flexible financing option for this reason.
SBA(7a) vs. SBA 504 Loans
Business borrowers will want to compare commercial and government loan financing products in advance. Here are the main differences between the SBA(7a) and SBA 504 loan programs:
- Collateral - SBA(7a) loans are collateralized agreements requiring near the full amount in asset value, for forfeiture should repayment of the loan default, to meet eligibility requirements for approval. SBA 504 loans are uncollateralized business financing agreements.
- Down Payment – Down payment requirements for SBA 504 loan financing is lower than required under 7a financing agreements.
- Fees - With a 504 loan, a flat fee percentage is applied to financing agreements, whereas fee assignment to a 7a loan agreement can increase depending on the amount.
- Financing – SBA(7a) loan agreements finance up to $5 million. SBA 504 loan agreements finance up to $20 million.
- Interest – The SBA references the prime interest rate for loan agreement application. The SBA(7a) program applies an adjustable interest rate to loan agreements, subject to market rate changes as result of federal monetary policy reform. SBA 504 loan agreements are assigned fixed interest rate upfront.
- Purchases - Federal guidelines for SBA lending prohibit use of 504 loan financing for outside business purchase and transfer transactions, or for other working capital expenditures, otherwise designated for financing under the SBA(7a) program.
Commercial Business Banking
Woodsboro Bank is the local source for business financing. We support the aspirations of all size businesses in our local communities. Our commercial loan products were designed to meet the capital purchasing requirements of businesses. Speak to a loan specialist about commercial lending from Woodsboro Bank. Capital growth is our business.