When it comes to SBA lending, the most common question we hear is, “What’s the difference between the SBA 504 and SBA 7a programs?” Many people are familiar with the better-known 7a and automatically assume that is the best option for financing any type of small business concern. However, each program was designed with a specific purpose in mind. When used for those purposes, both programs actually work together quite well. So what’s the difference? Essentially, the SBA 504, which is what Growth Corp specializes in, is the best choice when financing owner-occupied commercial real estate or heavy machinery/equipment. If the financing is to purchase a business, inventory or for working capital, the 7a is the best choice.
Growing Businesses: A Secret to Getting the Most From SBA Lending
We’ll let you in on a little secret. If you use each program for what they were intended, the availability of SBA dollars is maximized overall, which allows your business to grow more effectively. Why? Because each program has a lending limit imposed by SBA:
- SBA 504 – $5 million in most cases ($5.5 million for manufacturing)
- SBA 7a – $3.75 million net (guaranteed portion only) or $5 million gross
Therefore, when the 7a is used for real estate or heavy equipment financing, it occupies more SBA-available dollars than the 504 . This may prevent receiving additional SBA funding in the near future for things like working capital, inventory or other business needs when they arise…as they often do.
Example:
You approach a bank needing $5 million in financing to purchase commercial real estate. Your choice of SBA financing at this juncture may impact your future borrowing abilities. Because, consider this: let’s say a year later your business needs $750,000 in financing for working capital, inventory and additional equipment. If the 7a program had been used to finance the purchase of the real estate, you’re out of luck. There are virtually no SBA 7a dollars remaining to support your loan because they were used up in the real estate project. However, if you had used 504 for that original real estate project, there would still be $1.75 million in 7a dollars, or $3 million in 504 dollars, available to the business.
| SBA Program Used | Dollars Used | Dollars Left Available for Future Borrowing |
| SBA 504 | $2 million SBA dollars (40% of real estate purchase) |
$1.75 million in 7a, or $3 million in 504 |
| SBA 7a | $3.75 million SBA dollars (75% guarantee of $5 million loan) |
$0 in 7a, or $1.25 million in 504 |
Quick Tip: It is important to save 7a dollars for financing working capital and inventory because there is little/no collateral value in these items and they cannot be financed with the 504 Loan Program.
Benefits of 504 Loans
The 504 Loan program offers borrowers a fixed rate for 10 or 20 years, with lower fees than the 7(a) program, and often a lower down payment of 10%. Additionally, fees on the 7(a) loans tend to rise with the project size. However with 504 loans, the fees involved stay flat as a percentage when the loan amount increases. On a $1,250,000 commercial real estate project the fees for a 7(a) loan can top $36,000, while the fees for a 504 loan are just over $22,000.
In regard 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 option. Some banks do offer fixed 7(a) interest rates for 20 to 25 years. However, they also make money by selling off the guarantied portion of the 7(a) loan on the secondary market at a premium depending upon how the deal is structured for as much as 10 to 16% of the guaranty. The premiums the lenders receive when they sell the loan are higher for variable rates, and for longer term loans with prepayment penalties.
In addition, the 7(a) loan program has the “All Collateral Available Test.” This is where a small business borrower typically has to pledge all collateral available, including their personal residence to secure the loan. This test does not exists with a 504 loan.
Now that you know the main difference between the SBA 7(a) and SBA 504 loans, feel free to download our quick reference guide, Comparing SBA 504 and 7a