The U.S. Small Business Administration (SBA) offers several popular loans that are backed by the federal government. Two of their most popular options are the SBA 7(a) loan and the SBA CDC/504 loan.
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Although they are somewhat similar, they are available for different purposes and to different types of borrowers. They also offer different rates and terms, and have different application processes. Read on to find out more about the similarities and differences between the 7(a) and 504 loans and which one may be right for you.
Page written by Kat Cox. Last reviewed on August 12, 2024. Next review due October 1, 2025.
Kat Cox
Expert financial copywriter
As a B2B finance content specialist, Kat Cox's goal is to distill complicated financial issues into useful information for small business owners, to save them time they could be using to build their companies. Her work has been featured in Forbes and on financial health platform Nav.com. When she's not writing blogs, web copy, or fiction, Kat can be found walking her dog or singing karaoke in Austin, Texas.
Why is it common to compare the 504 and 7(a) loans?
The SBA 504 loan and SBA 7(a) loan are often compared to each other because they have a few qualities in common:
- Backed by the federal government
- Available to small businesses in the U.S. or its territories
- Offer relatively good interest rates and repayment terms
- Managed by the SBA through certified lenders
- Can be used for real estate, construction, property renovation, or equipment financing
- Provide loan amounts up to $5 million
However, the similarities between the two diverge from there.
What are the key differences between an SBA 504 and 7(a) loan?
To understand which of these two popular SBA loans to apply for, you need to understand their key differences.
1. The purpose of the loan
The SBA 504 loan is only available to businesses looking to purchase real estate or land, to make improvements on either or to buy or maintain large equipment. The 7(a) loan can also be used for real estate or commercial property but can also be used for working capital, to refinance debt or to purchase an existing business.
The key difference is that the SBA 504 loan requires that you use the funds specifically for real estate, equipment or property work that will include job creation or meet other public policy goals.
2. How much money you can get
A 7(a) loan generally offers less money to lenders, starting at about $30,000 and capping at $5 million. The 504 loan usually starts at about $125,000 and will provide up to $5.5 million for commercial projects, or more if you apply for the loan several times. The 7(a) loan will also have fees, whereas the 504 loan will not.
3. Interest rates and repayment terms
The 7(a) loan typically has a variable interest rate, while the 504 loan is usually fixed. The rates themselves are based on different factors:
- For a 7(a) loan, the rate is based on the prime rate plus the lender’s spread
- For the 504 loan, the interest rate is pegged to the rates of U.S. Treasury bonds.
In terms of repayment, you can get a 504 loan for 10 or 20 years, depending on what you’re using it for, while a 7(a) loan allows you to borrow for 10 years for working capital and 25 years for real estate.
4. The application process
The SBA 504 loan process is somewhat more complicated than the 7(a) application process, although it depends on a number of factors. This is because the borrower has to find a Certified Development Company (CDC) to fund 40% of the loan and a bank or credit union to foot 50% of the loan, while the borrower will put down the remaining 10% as a down payment.
A 7(a) loan has a less complicated application process because the borrower will work with the SBA-approved lender (usually a bank or credit union). The speed of approval and application time will depend on the borrower’s qualifications and the lender’s requirements.
5. The down payment and collateral
The SBA 504 loan requires you to pay at least 10% of the loan amount as a down payment. Some SBA 504 loans may require up to 20% of a down payment for startups or special purpose properties.
The 7(a) business loan has differing down payment or collateral requirements depending on the lender, although they generally start at 10%.
When would an SBA 504 loan be the better choice?
If you prefer a fixed rate loan and need a large amount of money to fund a commercial real estate project or to finance equipment, and you can prove that your project will create jobs or serve another public purpose, the SBA 504 loan may be a better choice for you.
Best for financing fixed business assets
The SBA CDC/504 loan is best for purchasing fixed business assets that will create jobs or serve another public purpose. These can include:
- Existing commercial buildings
- Commercial land
- Roadways
- Equipment
You can also use the loan to upgrade or modernize these options as well.
The requirements for a 504 loan are also different than those of a 7(a) loan, including:
- Having a business net worth of less than $15 million
- Having an average net income of less than $5 million for two years before applying
At the end of the day, a 504 loan is better for large commercial projects that won’t change much over time.
When would a 7(a) loan be the right choice?
Because of its flexibility, the 7(a) loan is usually better for general business purposes. If you have collateral available and don’t mind a variable interest rate, you may opt for a 7(a) loan. Also, the loan can be used for a wider range of purposes, including acquiring other businesses or expanding your existing business.
Best for general business financing
While you can use the 7(a) loan for real estate, similar to the 504 loan, there are a lot of other options available for using the funds. Also, you don’t have to prove that your project will stimulate job growth or otherwise help the public.
You can use a 7(a) loan for:
- Working capital
- Purchase or improve real estate
- Equipment
- Inventory
- Refinance business debt
- Buy an existing business or franchise
- Finance partner buyouts
In terms of qualifications, a 7(a) loan borrower must meet the SBA’s definition of “small business” and be able to show they’ve invested their own money in the business and can’t find financing elsewhere.
Are the applications similar?
Applying for an SBA 504 loan is more complicated and time consuming than applying for an SBA 7(a) loan. This is because you have to find a CDC to work with you first. They may require you to prequalify for the loan by submitting some paperwork before the application itself. They’ll also work with the SBA to find a lender to take over the other part of the loan.
On the other hand, the SBA 7(a) loan application goes through banks, credit unions, or other approved lenders directly, so it will take less time to be approved overall.
Both SBA loans can take 60-90 days to be approved once you’ve submitted the application. It’s highly likely that the 504 loan will have more scrutiny, though.
How should I choose between them?
Ask yourself a few questions to help you choose between the SBA 7(a) vs the SBA 504 loan programs:
Will this project create jobs or otherwise improve public projects in a specific way? If the answer is yes, a 504 loan may be the right choice.
Do I want to spend the funds on working capital, to refinance debt, or to finance a business purchase? If so, opt for the 7(a) loan.
Am I comfortable with a variable interest rate and collateral that isn’t necessarily the equipment or land I’m purchasing? If yes, a 7(a) loan may be the right choice.
How much money do I need to borrow? There’s no minimum for a 7(a) loan, although 504 loans start at $30,000. Both max out at about $5 million.
What are my qualifications? In order to qualify for a 504 loan, your business net worth must not exceed $15 million and you must have an average net profit of $5 million or less for the previous two years after taxes. Qualifications are different for 7(a) lenders, although they will still need to meet the requirements of a “small business” under SBA guidelines.
How do I compare possible loan values and rates?
It can be a little difficult to compare loan values and rates between a 7(a) loan and a 504 loan until you define exactly what you’re planning to use the funds for and have identified a lender. But Swoop can help you check rates and loan values. Check out our SBA loan calculator for more ideas on what you could be paying for an SBA loan.
Get started with Swoop
Find out what SBA loans are available for you through the Swoop app. Download today and start finding the right SBA loan for your business.
Written by
Kat Cox
As a B2B finance content specialist, Kat Cox's goal is to distill complicated financial issues into useful information for small business owners, to save them time they could be using to build their companies. Her work has been featured in Forbes and on financial health platform Nav.com. When she's not writing blogs, web copy, or fiction, Kat can be found walking her dog or singing karaoke in Austin, Texas.
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At Swoop we want to make it easy for SMEs to understand the sometimes overwhelming world of business finance and insurance. Our goal is simple – to distill complex topics, unravel jargon, offer transparent and impartial information, and empower businesses to make smart financial decisions with confidence.
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