SBA 7(a) vs. 504 Loan: Which Is Right For You?

Learn about the key differences between the SBA's 7(a) and 504 loan programs so that you can choose the right loan for your small business.

The Small Business Administration (SBA) offers several highly coveted financing programs for American entrepreneurs and small businesses. Among these programs are the 7(a) loan and 504 loan. Both are partially guaranteed by the SBA and boast more competitive rates, terms, and loan amounts than conventional financing. While these loans may appear similar at first glance, they are distinctly different.

Let’s dig into the differences between 7(a) loans and 504 loans so you can decide which is right for your business.

What Is an SBA 7(a) Loan?

The SBA 7(a) loan is the Administration’s most popular and versatile program. There are seven types of 7(a) loans that can collectively be used to finance many everyday business expenditures, including working capital. 7(a) loans are funded by two sources: an SBA-approved lender and a borrower with a maximum loan amount of $5 million. Rates may be fixed or variable, and an SBA Guarantee Fee will likely apply.

For context, the SBA guaranteed 57,362 7(a) loans versus just 5,924 504 loans in 2023.

An SBA Guarantee Fee is what the Administration charges lenders to afford the cost when borrowers default on their loans. Lenders, in turn, pass this fee on to borrowers.

SBA 7(a) Loan Use Cases

A 7(a) loan may be used to:

  • Purchase, Refinance, or Improve Real Estate and Buildings
  • Acquire Short-Term or Long-Term Working Capital
  • Refinance Business Debt
  • Purchase and Install Standard or AI-Related Equipment
  • Purchase Furniture, Fixtures, and Supplies
  • Change Ownership
  • Finance Two or More of the Above Applications

SBA 7(a) Loan Pros and Cons

The benefits of an SBA 7(a) loan include:

  • Wider Use of Funds. One of the most significant benefits of a 7(a) loan is its versatility. Borrowers can choose a single loan purpose or mix and match multiple loan purposes to meet their unique needs.
  • Lower Rates and Fees. The interest rates and fees for a 7(a) loan tend to be much lower than the small business loans offered through online lenders and commercial banks.
  • Availability to Startups. A 7(a) loan is one of the few options founders have that is not friends, family, crowdfunding, or equity-based financing.

However, an SBA 7(a) loan does come with some drawbacks:

  • Higher Cost Than a 504 Loan. In addition to an SBA Guarantee Fee, there are quite a few more fees the SBA allows 7(a) lenders to charge. These fees tend to be higher than those charged for a 504 loan.
  • Cumbersome Application Process. Applying for a 7(a) loan necessitates a lot of paperwork, time, and due diligence.
  • Personal Guarantee and Collateral. Owners of the borrowing entity may be expected to sign a limited or unconditional personal guarantee. Additionally, 7(a) lenders may require collateral depending on the type of 7(a) loan and amount.

What Is an SBA 504 Loan?

The SBA 504 loan is the Administration’s lesser-known, long-term, fixed-rate program. 504 loans can be used to purchase fixed assets like real estate and heavy equipment. In contrast to 7(a) loans, 504 loans are funded by three sources: a third-party lender, a Certified Development Company (CDC), and a borrower with maximum loan amounts of $5 million, $5.5 million, or more. Rates are typically fixed, and for 2024, the SBA Guarantee Fee will not apply.

SBA 504 Loan Applications

A 504 loan may be used to:

  • Purchase or Lease Land for an Eligible Project
  • Improve a Site (e.g., Landscaping, Land Grading, Road and Parking Construction)
  • Purchase One or More Existing Buildings
  • Convert, Expand, or Renovate One or More Existing Buildings
  • Construct One or More Buildings
  • Purchase or Lease Heavy Equipment and Machinery
  • Refinance Commercial Real Estate Debt (Including SBA Loans)

SBA 504 Loan Pros and Cons

The advantages of an SBA 504 loan include:

  • Larger Loan Amounts. There is no cap on the project size that a third-party lender can fund. Even though the CDC’s portion cannot be applied to more than $5 million, or $5.5 million for specific manufacturing and energy-efficient projects, the total loan can exceed those amounts.
  • Lower Cost of Capital. A 504 loan is one of the most affordable small business loans available today, with even lower rates and fees than a 7(a) loan. Moreover, the rates are fixed on the CDC’s portion and often the third-party lender’s portion of the loan.
  • Longer Repayment Terms. Another advantage of a 504 loan is its 10-, 20-, and 25-year repayment terms. This is a long-term loan, so borrowers can manage their cash flows more effectively.

However, the disadvantages of an SBA 504 loan are:

  • Less Flexibility Than a 7(a) Loan. A 504 loan can only be used to fund certain fixed assets, like owner-occupied real estate and heavy equipment, and projects.
  • Complex Two-Loan Structure. Applying for a 504 loan involves two lenders, a CDC and a third party, and subsequently two loans. This feature makes the process potentially longer and more cumbersome than a 7(a) loan for borrowers.
  • Personal Guarantee. Like a 7(a) loan, a 504 loan requires owners to sign a limited or unconditional personal guarantee. Collateral, on the other hand, is usually not necessary.

Key Differences Between an SBA 7(a) and 504 Loan

SBA 7(a) Loan
SBA 504 Loan
Financing Amount
Up to $5 Million
Up to $5 Million, $5.5 Million for Specific Manufacturing and Energy-Efficient Projects, or Higher Through the Third-Party Lender
Repayment Term
Up to 10 or 25 Years
10, 20, or 25 Years
Interest Rate
Fixed or Variable and Calculated Based on the Prime Rate or Optional Peg Rate Plus the Lender’s Spread
Fixed for the CDC’s Portion of the Loan and Calculated Based on the Market Rate for U.S. Treasury Notes
Fees
Lender’s Fees Plus an SBA Guarantee Fee
CDC’s Fees, Lender’s Fees, Plus No SBA Guarantee Fee
Down Payment
10 to 30% With Some Exceptions
10 to 20%
Additional Collateral
Often Required for Loans Over 50,000
Often Not Required
Eligibility Requirements
Lender’s Criteria Plus the SBA’s Minimum Requirements
Lender’s Criteria, CDC’s Criteria, the SBA’s Minimum Requirements, Plus the Following:

  • Net Worth of $15 Million or Less
  • Average Net Income of $5 Million or Less
  • Project Satisfies Job Creation, Retention, or Other Public Policy Goals
Use Cases
Wide Variety of Everyday Applications, Including Working Capital, Inventory, Business Acquisitions, Real Estate and Equipment Purchases, and More
Real Estate and Heavy Equipment Purchases, Construction, Improvement, or Renovation Projects, and Commercial Refinancing

Deciding Which SBA Loan Is Right For You

Deciding between the SBA 7(a) and 504 loan programs will depend on the application and your business’s goals. Let’s look at common instances where a 7(a) or a 504 loan is more appropriate.

Your business should choose a 7(a) loan for:

  • Working Capital to Purchase Inventory or Supplies, or Bridge Cash Flow Gaps
  • Smaller Loan Amounts With a Shorter Turnaround for Funding
  • Purchases of Real Estate or Heavy Equipment That Don’t Meet the Project Eligibility Requirements of a 504 Loan

Alternatively, you should choose a 504 loan for:

  • Purchases of Real Estate or Heavy Equipment
  • Construction, Improvement, or Renovation Projects
  • Refinancing 7(a) Loans or Other Commercial Debt

Now, let’s consider two real-world examples.

Say you own a graphic design agency in Seattle, WA. Business is booming, but you’re at capacity with your current team and office space. You need a loan to cover the cost of hiring more staff, purchasing new equipment, and relocating to a bigger office. An SBA 7(a) loan is an excellent option in this example.

Across the street from your graphic design agency is a specialty coffee shop with a similar problem. Business is good, but they have outgrown their location due to increasing demand and popularity. The owners have found a plot of land suitable for a larger location that would enable them to serve more customers and expand their menu offerings. This endeavor will require a loan to cover the land purchase, construction, equipment costs, and ancillary expenses. An SBA 504 loan is a better option in this example.

Navigating Your Path to Business Growth

The SBA’s 7(a) and 504 loan programs are two of the most desirable financing options available to entrepreneurs and small businesses today. Deciding which SBA loan is right for your business will depend on your needs and goals. Whether you’re still unsure or ready to move forward, 1st Capital Financial can help. Start the process here.

Apply for an SBA 7(a), Express, or 504 Loan Today

Give your business its best shot at approval for an SBA loan with 1st Capital Financial’s industry-leading expertise and guidance.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1st Capital Financial and its affiliates assume no liability for actions taken in reliance upon the information contained herein.

1CF_Author_Michelle_Cornish
Michelle Cornish
Guest Author
Michelle Cornish is a freelance writer based in scenic BC, Canada. As a former CPA with almost 20 years of experience working with small business owners, Michelle enjoys helping people spend more time doing what they love and less time pondering their books and records. She also contributes to platforms like QuickBooks, TurboTax, and Sage with the aim of making tax and accounting more accessible to everyone.
Avatar for The 1st Capital Team, Author and Contributor for The 1st Capital Courier
The 1st Capital Team
Editorial Staff
The 1st Capital Team is comprised of seasoned small business experts and content marketing professionals adept at gathering the best and most accurate information and resources available for its readers.

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