Differences Between Major SBA Loan Programs – SBA 7(a) vs. SBA 504

Source: FNB blog

Admittedly, SBA program names are a bit esoteric and hard to remember for everyone who doesn’t work day to day around these government-backed loan processes. Still, the SBA lending program is a widely utilized way to get financing in a reasonable period of time with competitive terms and some important benefits. One advantage of the program is that it is not a one-size-fits-all solution. There are multiple loan options within the program to choose from. The key is determining which option fits your business needs the best.

By understanding your options, you can choose a loan that addresses immediate needs as well as future growth. Maybe you need financing to purchase commercial real estate, start construction on a building for your business, or maybe you have a wide range of business expenses to cover in order to start your business. Whatever your specific needs, there’s an SBA option for you!

The two most popular SBA loan programs are the SBA 7(a) program and the SBA 504 program. Each offers unique financing benefits that we dive into below:

SBA 7(a) Loan Details

  • Proceeds can be used for a wide variety of business purposes, including:
    • Commercial Real Estate
    • Business Acquisition
    • Partner Buyout
    • Business Startup
    • Debt Refinance
    • Ground-Up Construction
    • Leasehold Improvements
    • Equipment
    • Working Capital
  • Loan terms range from 10 – 25 years and are fully amortizing
  • Financing ranges from 70% to 100% of total project cost
  • Maximum loan amount of $5 Million with no minimum amounts
  • A business must be for-profit and fall within a size limit of having a tangible net worth of less than $15 Million and have had an average profit of less than $5 Million in the last two years
  • Combine multiple uses of proceeds into one loan

SBA 504 Loan Details

  • Proceeds can be used to purchase fixed assets, including owner-occupied commercial real estate and equipment or improvements and new construction
  • Often referred to as a 50/40/10 loan
  • Loan terms up to 25 years with a fixed rate on the CDC portion
  • We offer a 25-year term on the first mortgage with rates that adjust every 5 years
  • Up to 90% financing for existing businesses
  • Loan amounts up to $12 Million with no minimum amounts
  • A business must be for-profit and fall within a size limit of having a tangible net worth of less than $15 Million and have had an average profit of less than $5 Million in the last two years
  • Combine multiple uses of proceeds into one loan
  • Can be combined with an SBA 7(a) loan to cover related costs of the project

Primary Differences

  • 7(a) loans are much more versatile for small businesses and start-ups, because they can cover many financing needs.
  • 504 loans are used only for the purchase and improvements of land and real estate.
  • For 504 Loans, typically, the First Trust Lender provides 50% financing, and an arm of the SBA called the Certified Development Company (CDC) provides 40% financing and the borrower injects 10% of the project cost in equity.

The information above is a high-level description of the SBA 7(A) and 504 loan programs. Still not sure which options works best for your business? Ask your finance/accounting professionals.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance has multiple offices in the Carolinas including Charlotte, Raleigh/Durham, Greensboro, and Wilmington with a team of more than 45 professionals serving more than 130 companies throughout the region.