Finding the right loan for your small business can be tricky. It can be hard to know which one is right for you with all of the different options available. This article will discuss two of the most popular types of small business loans: SBA 504 and 7(a) loans. We will outline the benefits of each loan and provide some tips on how to decide which one is right for you.
What are SBA 504 and 7(a) Loans?
SBA 504 and seven (a) loans are financing products offered by the Small Business Administration (SBA). They’re designed to help small businesses grow and expand. SBA 504 loans can be used to purchase fixed assets, such as real estate or equipment. Seven (a) loans can be used for working capital, such as inventory or payroll.
Contact your local SBA office if you think you might be eligible for an SBA 504 or seven (a) loans. A staff member can help you determine if you meet the eligibility requirements and walk you through the application process.
Loans from the Small Business Administration (SBA) can be a great way to finance your small business. But with so many different types of loans available, it can be challenging to know where to start.
How do they work?
The 504 loan program provides financing for the purchase of fixed assets, including land and buildings, and equipment. The maximum amount that can be borrowed is $20 million, and the interest rate is fixed for the life of the loan.
The terms of the 504 loan are usually ten years for real estate and 20 years for equipment. This makes the payments more affordable than if you were to get a conventional bank loan with a shorter term.
To qualify for a 504 loan, your business must meet specific size standards. For example, your business’s maximum number of employees is 500, and your average annual revenue must be less than $15 million over the past three years.
If you think that your business might qualify for a 504 loan, the first step is to contact your local SBA district office. They will be able to help you determine if you meet the eligibility requirements and can put you in touch with a participating lender. The SBA also offers seven-year loans similar to the 504 loans but have shorter terms.
The benefits of using SBA 504 and 7(a) Loans for businesses
SBA 504 and seven (a) loans are two of the most popular financing options for small businesses in the United States. But what are they? How do they differ? Let’s take a closer look.
The Small Business Administration (SBA) is a government agency that provides support to small businesses through various programs and services. One of the most popular ways the SBA supports small businesses is by guaranteeing loans made by private lenders.
The SBA 504 Loan Program provides long-term, fixed-rate financing for significant fixed assets, such as land and buildings. The loan terms are 20 years for real estate and up to ten years for equipment. The SBA 504 Loan Program is available through participating lenders nationwide.
Suppose you’re purchasing an existing building, expanding, or building new construction. The SBA 504 loan allows business owners to finance construction costs, closing costs, and soft costs, including architectural fees, engineering, surveys, title insurance, and more, within the loan.
The SBA’s 7(a) Loan Guaranty Program is the most versatile and popular of all the agency’s loan programs. It can be used for various purposes, including working capital, inventory, and equipment financing. Loan terms are up to ten years for working capital and up to 25 years for fixed assets. The SBA 7(a) Loan Guaranty Program is available through participating lenders nationwide.
Who is eligible for an SBA 504 Loan?
To be eligible for an SBA 504 loan, you must:
- Be a for-profit business
- Operate primarily within the United States
- Meet the SBA small business size standards
- Have a tangible net worth of less than $15 million and an average net income of less than $ five million for the two years before applying for the loan
- Borrowers must find an SBA-approved Certified Development Company to fund 40% of the project. Another lender, such as a bank or credit union, must provide 50% of the project’s cost.
- Use the proceeds from the loan to finance fixed assets, such as land and buildings, machinery and equipment, or vehicles. At least 50% of the invested assets must be used for long-term (more than seven years) commercial real estate loans.
- Loans guaranteed by the SBA under Section 504 cannot be used for working capital or inventory purposes, finance the intangible property, or refinance debt. Borrowers must create or retain one job for every $65,000 provided by the SBA (up to ten jobs).
The maximum loan amount is $ five million. In addition, 504 loans are typically structured with a 50/40/ten percent participation by the lender, the borrower, and the SBA, respectively.
Who is eligible for a 7(a) Loan?
To be eligible for a 504 loan, you must:
- Be a small business as defined by the SBA.
- Operate for profit
- Do business in the U.S. or its possessions.
- Have reasonable equity in the business and not have access to another financing at reasonable terms
- Use the loan proceeds for fixed assets, including land and buildings, machinery and equipment, vehicles, or fixtures.
- Meet the SBA’s business size standards for your industry sector.
How to apply for an SBA 504 or 7(a) Loan?
The first step is to visit the SBA website and fill out the online form. After that, a representative will contact you to discuss your options. There are two types of SBA loans: 504 and
The next step is to gather all required documentation. This includes tax returns, business licenses, financial statements, and more. Once you have everything together, you can submit your loan application online or in-person at a participating lender.
SBA loans can be used for various purposes, including working capital, equipment purchases, real estate investment, and more. So if you’re thinking about starting or expanding your small business, an SBA loan may be right.
The difference between SBA 504 and 7(a) Loans
You’ve probably heard of SBA loans if you’re a business owner. But what exactly are they? And how do you know if an SBA loan is right for your business?
SBA 504 loans are specifically for purchasing fixed assets, such as real estate or equipment. On the other hand, SBA 7(a) loans can be used for working capital or fixed asset purchases. So, which one is right for your business?
Let’s look at each type of loan to see which one best fits your needs.
504 Loan:
- The loan is for fixed assets only
- You must have a down payment of at least 20%
- The interest rate is fixed for the life of the loan making cash flow and planning easier
- terms are usually 20 years or less
Now, let’s take a look at SBA 7(a) loans:
- It can be used for working capital, fixed asset purchases, or any business expense
- There is no minimum down payment required
- Interest rates are variable and determined by the prime rate plus a margin
- Terms can be up to 25 years
When is the best time to use an SBA 504 or 7(a) Loan?
The 7(a) loan is the SBA’s most popular loan program for small business owners. Many who would not otherwise qualify for a conventional small business loan find that they are eligible for the SBA 7(a) program.
The 504 loan program is specifically designed to provide financing for the purchase of fixed assets, such as real estate or equipment. The SBA 504 loan program is only available through a Certified Development Company (CDC), SBA’s community-based partners who regulate nonprofits and promote economic development within their communities.
So, when is the best time to use an SBA 504 or a loan? Here are some guidelines:
- If you’re looking for financing to purchase fixed assets, such as real estate or equipment, then the 504 loan program may be your best option.
- If you’re starting a business from scratch and need working capital to get things off the ground, the SBA loan may be your best bet.
- If you don’t qualify for a conventional small business loan, the SBA loan may be your only option.
Of course, these are just guidelines, and you should always speak to a small business lending expert to get tailored advice for your specific situation.
In conclusion
If you’re a small business owner, the best time to use an SBA 504 or a loan is when you’re looking for financing to purchase fixed assets, start a business from scratch, or don’t qualify for a conventional small business loan. Speak to a small business lending expert to get tailored advice for your specific situation.
