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Differences between 7a and 504 SBA loan programs

The 7(a) and 504 loan programs are two distinct offerings from the U.S. Small Business Administration (SBA), each designed to support small businesses but in different ways and with different specific purposes. Understanding the differences between these programs is crucial for businesses seeking the right type of financial assistance.

  • 7(a) Loan Program

Primary Purpose: The 7(a) loan program is the SBA's most common loan program. It is designed to provide financial assistance for a wide range of business purposes.

Loan Uses: These loans can be used for almost any business purpose, including working capital, refinancing existing debt, purchasing equipment, real estate, and even for establishing or acquiring a new business.

Maximum Loan Amount: The maximum loan amount under the 7(a) program is $5 million.

Guarantee Percentage: The SBA guarantees a portion of the loan (up to 85% for loans under $150,000 and 75% for loans over that amount), reducing the risk for lenders.

Eligibility: Broad eligibility criteria, catering to a wide range of small businesses.

Interest Rates: The interest rates can be either fixed or variable and are subject to SBA maximums, often linked to the prime rate.

Maturity Terms: Varies based on the loan's purpose — up to 7 years for working capital, 10 years for equipment, and up to 25 years for real estate.

  • 504 Loan Program

Primary Purpose: The 504 loan program is focused on long-term, fixed-rate financing for major fixed assets, often involving real estate or large equipment.

Loan Uses: Specifically used for the purchase, renovation, or construction of real estate, buildings, and large equipment. It is not for working capital or inventory.

Maximum Loan Amount: The maximum loan amount generally is around $5 million, but certain energy-efficient or manufacturing projects can go up to $5.5 million.

Guarantee Percentage: The program works by distributing the loan among three parties — the borrower, a bank, and a Certified Development Company (CDC). The borrower typically must put down 10%, the bank lends 50%, and the CDC (backed by a 100% SBA-guaranteed bond) covers 40%.

Eligibility: More specific eligibility requirements focusing on job creation/retention or certain public policy goals.

Interest Rates: Fixed interest rates tied to 5-year and 10-year U.S. Treasury notes.

Maturity Terms: Typically, 10- or 20-year terms for real estate and fixed assets.

Key Differences

Purpose and Use of Funds: 7(a) loans are more versatile, covering a wide range of business needs, while 504 loans are specifically for real estate and major fixed assets.

Loan Structure: The 504 program involves a split between a CDC and a bank, unlike the 7(a) program, which involves direct lending from financial institutions with an SBA guarantee.

Maximum Loan Amounts and Terms: While both have similar maximum amounts, their terms and structures differ significantly.

Interest Rates: The 504 program offers fixed-rate loans, whereas the 7(a) program includes both fixed and variable rate loans.

Eligibility Criteria: The 504 program has more stringent eligibility criteria, often tied to job creation and specific project types.

In summary, while both programs aim to support small businesses, the 7(a) loan is more general and flexible in its use, while the 504 loan is specialized, focusing on long-term financing for fixed assets.

Are you looking for a feasibility study for 7a or 504 loan programs? Contact us today.

Source: SBA, Michal Mohelsky, JD

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