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Should I Consider A SBA 7(a) Or A 504 Loan?

Written By Joshua Proto

Some loans can be used for similar purposes while other have more strict terms of use. Among all the loan options available through the SBA , it’s SBA 7(a) and 504 loans are good examples of this principle. Although both loans require the applicant to personally guarantee part of the loan and require collateral, there are enough significant differences between the two that potential applicants should be aware of in order to make the best financial choice for their business. Generally, SBA 7(a) are loans for more general purposes like working capital and debt refinancing and 504 loans are for purchasing long-term machinery and real estate. These differences just scratch the surface, so let's go into more detail about these loans below.

SBA 7(a) Loans

SBA 7(a) loans are classified as general purpose loans that businesses can utilize for a variety of needs. Working capital, debt refinancing, machinery purchase, or business acquisition are all suitable uses for an SBA 7(a) loan. The SBA requires the applicant to make no down payment and will, in turn, guarantee 85% of the value of the loan with the lending bank. There is a small caveat to this in that a 10% down payment is required for commercial real estate loans. The SBA does not lend the loan directly but guarantees part of the loan so the applicant can receive a competitive interest rate. If you would like an SBA 7(a) loan we can get you one.

Loan Rates

The SBA sets maximum interest rates for its SBA 7(a) loans, which are based on the prime rate with the addition of a few percentage points. Since the interest rates are based on the prime rate, this makes their interest rates more competitive to other lenders. Although, the final interest rate will always depend on the total amount of the loan and it’s repayment period, with larger amounts and longer time periods having larger interest rates.

Loan Terms

With a typical SBA 7(a) loan, you can borrow up to $5 million with loan repayment terms up to 10 to 20 years. However, there are a number of different types of SBA 7(a) loans that can appeal to a variety of business needs. For instance, their Export Express loans can provide 24-hour decision turnaround for either a loan or line of credit and their CAPLines program help businesses establish lines of credit to meet their working capital needs for the short term. These loans also come with a small fee based on the size of the loan, with loans less than $150,000 requiring no fees.

504 Loans

A main goal of the 504 loan program is to provide businesses with funding that will promote business growth and lay the foundations for job creation. 504 loans have strict usage requirements and are only available to businesses that are looking to purchase long-term machinery, making facility or location renovations, and purchasing land or real estate. These loans actually contain two loans, a conventional bank loan that equals 50% or more of the total loan amount and a Certified Development Company (CDC) loan for up to 40% of the total amount. The borrower is again required to give a downpayment of 10% but the SBA will guarantee the full amount of the CDC loan.

Loan Rates

The interest rates for 504 loans are fixed rates that are based off the U.S. Treasury Yield Rate. Both the 5 and 10-year rates contribute to the final rate for 504 loans and both 10-year and 20-year loan maturity repayment options are available depending on the borrower’s needs. Fees will also be applied depending on the total loan amount and length of repayment terms.

Loan Terms

504 loan repayment terms are typically 20 years for real estate and 10 years for equipment. Though the maximum loan amount can vary between $5 million for job creation initiatives to $5.5 million for small manufacturing and public policy purposes. For job creation initiatives, one job must be created for every $65,000 guaranteed, and for small manufacturing purposes, one job must be created for every $100,000 guaranteed. The projects funded by these loans typically serve as collateral.

Last Updated Date: 2018-06-20