SBA 7(a) vs. 504 Loans: What's the Difference?

SBA 7(a) vs. 504 Loans: What's the Difference?

Compare Small Business Loans


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The Small Business Administration (SBA) backs a number of loan programs to help small businesses gain access to the capital they need in order to grow. In this article, we compare two of the administration’s most popular programs: the 7(a) loan and the 504 loan.

SBA 7(a) vs. 504 Loan Summary

7(a) loans are general purpose loans, meaning they can be used for anything from working capital to business acquisition. 504 loans, for comparison, can only be used for commercial real estate or long-term machinery purchases. 504 loans come with lower interest rates and down payments than 7(a) loans, making them a much better choice if you are planning on buying property or investing in equipment. While 7(a) loans can also be used for real estate, they are better suited for other uses, such as working capital, debt refinancing or supplies and inventory, because they offer more flexibility in their terms.

SBA 7(a) Loan (Read More)SBA 504 Loan (Read More)
What Can You Use the Loan For?
  • Working capital
  • Furniture and fixtures
  • Equipment and machinery
  • Real estate (except investment real estate)
  • Leasehold improvements
  • Business acquisition
  • Starting a business
  • Debt refinancing
  • Purchasing land, including existing buildings
  • Making lot improvements, such as street upgrades or landscaping
  • Construction or renovation
  • Purchasing long-term equipment or machinery
Typical Loan Structure
  • At least 10% down payment
  • 90% or less bank loan
  • 10% down payment
  • Up to 40% CDC loan
  • 50% or more bank loan
Maximum Loan Amount$5 million$20 million or more ($5 - $5.5 million for CDC portion of loan)
Maximum Interest Rates6.75% - 9.25%4% - 5%
Maximum Repayment Term
  • 10 years for inventory or working capital
  • 10 years or useful life for equipment, furnitures or fixtures
  • 25 years for real estate
  • 10 years for machinery or equipment purchases
  • 20 years for real estate

Fees and Collateral Requirements

Both loan programs require applicants to personally guarantee the loan–that is, to be personally responsible for repaying it if the business can’t–and to put up some sort of collateral. Prepayment penalties are also commonplace with SBA loans, with all 504 loans and short-term 7(a) loans having them. For 7(a) loans with terms of 15 years or less, the prepayment penalty will be declining for the first three years from 5% in the first year to 1% in the third year. For 504 loans, the prepayment penalty declines for the first half of the loan term. This means that if the loan has a term of 20 years, prepaying any part of the loan during the first 10 years will incur additional fees.

7(a) Loan504 Loan
SBA Fees
  • Guarantee fee
  • CDC servicing fee
  • Central servicing agent fee
  • Borrower SBA fee

Prepayment Penalty

Yes, for loans with terms of 15 years or less if the loan is prepaid during the first three yearsYes, declining prepayment penalty for half of the loan term
Personal GuaranteeYesYes
CollateralYes, may include owner’s personal residenceYes, generally the assets being financed

How to Qualify

The main difference between qualifying for these loans are the size requirements. For 7(a) loans, businesses must meet the standard SBA size requirements. For 504 loans, the SBA defines size by the business’s net worth and average net income after taxes. More broadly, the SBA also looks for businesses and their owners that meet the “5 Cs of Credit”: capacity, character, collateral, conditions and capital. You’ll need to demonstrate good personal or business credit, sufficient cash flow to repay the loan and a strong business plan. The SBA will also want to see that you have relevant management or industry expertise to carry out the project.

7(a) Loan504 Loan
Eligibility Criteria
  • For-profit business in U.S.
  • Meet SBA size standards
  • Good credit
  • Demonstrated ability to repay
  • Good character of owners
  • Relevant management experience
  • Strong business plan
  • Cannot be an ineligible business
  • For-profit business in U.S.
  • Net worth of less than $15 million and average net income less than $5 million after taxes for past two years
  • Property must be owner-occupied (51% for existing and 60% for new construction)
  • Good credit
  • Demonstrated ability to repay
  • Good character of owners
  • Relevant management experience
  • Strong business plan
  • Cannot be an ineligible business

Choosing Between 7(a) and 504 Loans

We recommend 7(a) loans for any purpose except large real estate projects or expensive equipment or machinery purchases. This is because 504 loans are purpose-built for these tasks and therefore offer better rates and terms. 7(a) loans, on the other hand, are general purpose loans, meaning they can be used for a variety of business needs, and they should be your go-to SBA loan if you don’t need to buy real estate or expensive equipment. You can use 7(a) loans for working capital, business acquisition and inventory management needs.

There are a few special types of 7(a) loans that are well-suited for particular borrowers and businesses. One is the Express loan, which offers speedy processing times in exchange for smaller loan amounts and slightly higher interest rates. There is also a special line of credit program, called CAPLines, that has the same terms as a 7(a) loan, but gives business owners access to revolving credit. Finally, there are a number of export and international trade loans under the 7(a) program that allow business owners to start or expand their export business.

504 loans, on the other hand, can only be used for real estate or long-term equipment purchases. Because 504 loans are specifically designed for these purposes, they are the best option between the two if you are purchasing or building property or investing in long-term equipment. Not only do they currently have lower interest rates than 7(a) loans, but they have low down payment requirements and very high loan amounts. The interest rates on the CDC portion of the loan are fixed, making it an even more attractive option in a low rate environment. You can also use a 504 loan to refinance an existing commercial mortgage to a lower interest rate through the Debt Refinancing program.

When it comes to applying for either program, you’ll need to start with your bank. If your bank does not participate in either program, you can find a list of SBA approved lenders in your area through the administration’s website. For either program, you’ll need to prepare quite a few documents, including financial statements and projections, personal and business tax returns, licenses and registrations, and a business plan. Your bank may require additional documents or criteria above and beyond what the SBA requires, so you'll need to speak with your banker to get more information about what the application process entails.

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.

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