For small business owners, navigating the SBA loan landscape can be challenging, especially when it comes to comprehending the distinctions between the SBA 504 and SBA 7(a) loan, the two SBA loan programs that are most frequently used.

The SBA 504 loan, also referred to as the Certified Development Company (CDC) loan, is crafted especially for the purchase or renovation of industrial machinery and commercial real estate. Small businesses who want to buy or renovate a structure or facility that will serve as their primary place of business frequently turn to this loan program for assistance. A long-term, fixed-rate loan with a maturity of up to 20 years is how most loans are set up.

Contrarily, the SBA 7(a) loan is a more versatile loan program that can be used for a range of purposes, including working capital, inventory, and equipment purchases. Small businesses that require money for operations, expansion, or to refinance debt frequently turn to this loan program. Usually, the loan has a variable interest rate and a maximum maturity of 25 years.

The method of funding the loan is one of the main distinctions between the SBA 504 and SBA 7(a) loans. A private lender, like a bank or credit union, provides a portion of the SBA 504 loan’s funding. The other portion is provided by the SBA. While the SBA only guarantees a portion of the SBA 7(a) loan, one participating lender provides the full funding for that loan.

The loan’s size is another important distinction between an SBA 504 and SBA 7(a) loan. While the SBA 7(a) loan has a $5 million maximum loan amount, the SBA 504 loan has a $5.5 million maximum loan amount. For some loan types, like export working capital loans and small business investment companies, the SBA 7(a) loan does, however, also provide a higher maximum loan amount.

Additionally, the down payment needed for the SBA 504 loan is less than that needed for the SBA 7(a) loan. The typical down payment needed for an SBA 504 loan is 10%, whereas the typical down payment needed for an SBA 7(a) loan is 15%.

The credit score prerequisite is yet another crucial distinction between SBA 504 and SBA 7(a) loans. A credit score of at least 680 is typically required for an SBA 504 loan, while a score of at least 620 is typically required for an SBA 7(a) loan. The borrower must also meet additional requirements for the SBA 504 loan, including having a net worth of at least $15 million and a two-year average net income of at least $5 million.

Additionally, there are various fees connected with the SBA 504 and SBA 7(a) loans. Depending on the loan amount and the lender, the one-time fee for the SBA 504 loan is 2% of the loan amount, while the fee for the SBA 7(a) loan ranges from 3-4% of the loan amount.

When contrasting the SBA 504 and SBA 7(a) loan, interest rate is a crucial additional consideration. In contrast to the SBA 7(a) loan, which typically has a variable interest rate in the range of 7–10%, the SBA 504 loan typically has a fixed interest rate that ranges from 4-6%. The SBA 7(a) loan’s interest rate, though, could be higher or lower depending on the participating lender and the loan’s conditions, so it’s important to keep that in mind. It’s also important to keep in mind that the SBA 7(a) loan also provides a higher maximum loan amount for specific loan types, like export working capital loans and small business investment companies.

The SBA’s 504 and 7(a) loan programs are two well-known loan options that can assist owners of small businesses in getting the money they require to develop and grow their companies. Both loan programs have their own advantages, but the SBA 504 loan is specifically made for the purchase or renovation of commercial real estate and heavy equipment, whereas the SBA 7(a) loan is a more versatile loan program. Before submitting an application, it is essential for small business owners to comprehend the variations between these loan programs and which one will best meet their needs.

It’s also crucial to remember that both loans have specific eligibility requirements, such as required credit scores and net worth levels, as well as different fees and loan maximums. To help you navigate the loan process and decide what’s best for your business, it’s always advisable to speak with a financial advisor or a lender who has received SBA approval.

F2H Capital Group is a debt advisory firm specializing in negotiating the best terms for your commercial real estate projects. The company offers a range of financial products and services, including fixed loans, bridge loans, and construction loans across all asset types. Please contact us for any of your financing needs.