Small business loans are important in supporting not only small business growth but also economic development and job creation across the United States. Two common loan options for small enterprises today include SBA 7 a loans and 504 loans, which are both backed by the U.S. Small Business Administration (SBA). This SBA guarantee makes it less risky for lenders to provide funding to small businesses and helps more companies secure financing.
Though the two programs are similar in nature and are popular loans among small business owners, there are distinct differences when it comes to the potential loan amounts, terms and accepted uses for each. With that in mind, the following factors can help small business owners compare and contrast a 7a vs 504 loan to decide which is the right opportunity.
Differences in SBA 504 vs 7a Loans
The defining difference between the SBA 504 vs 7a loan programs is what purpose the small business has for the funds, in addition to variation in repayment terms, loan amounts and eligibility requirements.
SBA 504 Loans
For example, an SBA 504 loan is mostly used when a company is looking to finance the purchase of fixed assets. This could include buying or upgrading commercial property or machinery and equipment. The structure of a 504 loan is unique, with partial funding coming from a bank loan and another portion coming from a Certified Development Company (CDC), a local nonprofit lender that promotes economic development in their area.
Here are some other defining characteristics of SBA 504 loans:
- Loan amount: $50,000 to $5 million, or a maximum loan amount of $5.5 million for certain exceptions
- Maximum repayment terms: 10, 20 or 25 years
- Interest rate: fixed rates
- Down payment: 10%, with some exceptions
- SBA fee: fixed-percentage fee on loan amount
- Collateral: the fixed assets being financed
- Eligibility: business net worth <$15 million, average net income <$5 million, meet job creation or public policy goals
SBA 7a Loans
On the other hand, small business owners are more likely to consider an SBA 7a loan when starting or expanding their business and will use the funds as working capital. These are highly common loans and can even be used to finance business acquisitions.
A 7a loan has the following considerations:
- Loan amount: $5,000 to $5 million
- Maximum repayment terms: 10 years for working capital and equipment financing, 25 years for real estate
- Interest rate: variable rates
- Down payment: 10% – 20%
- SBA fee: depends on the size of the loan
- Collateral: required for loans >$25,000, can include personal residences
- Eligibility: meet SBA’s definition of a “small business” (independently operated and <500 employees), invested own money in the business, and prior attempt to use alternative financial resources
SBA 7a vs 504 Loans: How are They Similar?
Despite the differences in SBA 7a vs 504 loans, there are some similarities between the two programs. Small business owners can utilize both types of loans to finance machinery and equipment purchases or to refinance debt. In addition, both types of loans require applicants to be for-profit businesses in the US or US territories.
So while there may be some crossover when comparing 504 vs 7a loans, it should be fairly simple for businesses to delineate which loan application they will need to complete given the conditions listed above.
About Extensia Financial
Established in 1998 and headquartered in Simi Valley, CA, Extensia Financial partners with credit unions and brokers to connect them to investors across the United States. For decades, we have offered competitive and collaborative commercial loans, including 504 loans, and have uniquely supported and guided our partners through the entire full lifecycle of our loans. Extensia Financial is a proud member of the AVANA Family of Companies.
Contact us today to learn more about becoming an Extensia Financial partner.