If you’ve started to look into SBA loans as a way to grow your business, you might be wondering about the differences between the agency’s 7(a) and 504 loan programs.

SBA 7(a) vs 504 Loans: Which Is Right for My Business?

Officially known as the Standard 7(a) and the CDC/504, these loan programs are the dual flagships of the SBA.

In this article, we’ll cover the key attributes of each program and how to make the right choice for your specific goals.

What Is an SBA Loan?

The U.S. Small Business Administration is an independent agency of the federal government that assists small businesses and entrepreneurs. The SBA partners with local lenders (banks and credit unions) to provide affordable loans for a range of business purposes, including startup costs, working capital, real estate and equipment purchases, and debt refinancing.

The SBA guarantees a portion of each loan to mitigate lender risk and enable more small business owners – including those in underserved communities – to access the capital they need.

Reasons to Consider an SBA Loan

SBA loans offer small businesses key advantages, including:

• Competitive rates: Because they’re a lower risk for lenders, SBA loans often feature lower interest rates.
• Lower fees: SBA loans may involve an upfront and/or yearly service fee, but these are generally nominal.
• Longer terms: Maximum maturities range from 10 years (for working capital, inventory, and equipment) to 25 years (for real estate).
• More flexibility: Loan amounts range from $500 to $5.5 million, depending on your needs and capacities.
• Continued support: The SBA and its local partners offer free and low-cost business training and counseling.

7(a) vs. 504

Officially known as the Standard 7(a) and the CDC/504, these loan programs are the dual flagships of the SBA. Both provide relatively long-term, low-cost financing to small business owners looking to make major investments in their enterprises. And in either case, you can work directly with your financial institution to learn more and get started.

Their purposes and processes are similar, but 7(a) and 504 loans differ in three important areas:

1. Uses: The biggest difference between these two loan programs is what you can use the funds for. Either loan can be used for long-term fixed assets like buildings, land, and heavy machinery. But only 7(a) loans can be used for shorter-term needs like working capital and inventory. Under certain circumstances, both loans can be used to refinance existing commercial debt. The regulations are particularly stringent for the 504 program. Consult your lender to learn more.
2. Eligibility: Most of the SBA’s basic eligibility requirements apply to both loan programs. For example, all borrowers must operate as a for-profit company in the U.S. or its territories, meet SBA size standards, and be current on all outstanding government debts. However, to qualify for a 504, your business also must have a net worth under $15 million, a net income under $5 million per year, and a plan for meeting specified job creation targets.
3. Terms: Here, too, these two programs are more alike than not. For both, the maximum loan amount for most projects is $5 million, with an expected owner equity contribution of around 10%. Maturities range up to 25 years, and prepayment is possible but may incur a penalty. Rates for 7(a) loans may be fixed or variable, while 504s are normally fixed rate. Because of the program’s stricter requirements, 504 rates and fees tend to be somewhat lower.

What’s the Best Fit?

In deciding which loan to pursue, first assess your needs. If your business growth strategy calls for working capital or current assets, that automatically rules out a 504. But if you’re looking to purchase existing buildings or land, improve or construct new facilities, or finance long-term machinery or equipment, that leaves both programs in play.

If you meet the additional net worth, net income, and business plan requirements or the 504 program, you may find that its lower rates and fees make it the more affordable option. Additionally, because most 504 loans are fully self-secured, it can be a better choice for solo entrepreneurs with limited outside collateral or partnerships with unequal personal assets.

Still and all, the 7(a) remains the SBA’s most popular loan program because of its greater versatility and lower barriers to entry.

An experienced commercial lender can help you to run the numbers and make the best decision.

Can I Combine a 7(a) and a 504?

Given the comparative advantages of these two loan programs, many business owners with a mix of financing needs wonder whether pursuing both at once could be a win-win solution.

There’s no specific prohibition against applying for more than one SBA loan at the same time, but lenders are likely to view this as a riskier proposition. If you have excellent business credit and highly dependable cashflow to support multiple repayment schedules, it might be worth a try. Otherwise, it’s probably best to secure one SBA loan and establish an unbroken record of on-time, in-full payments before going after another one.

What Are My Other Options?

You may want to consider a few other types of SBA loans, including:

• Express loans, which feature an accelerated turnaround time and have special options for exporters
• Microloans, which provide up to $50,000 for smaller startup and expansion needs
• Disaster loans, which help businesses overcome economic injury or damage in the wake of a declared disaster

Your lender can also help you to investigate non-SBA loan products and weigh all the pros and cons.

Take the First Step Today

To explore all your small business financing options, including SBA loans, consult your financial institution.

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