504 vs. 7a Loan Comparison

When you are considering a small business loan, there are several loan options available and many look at the SBA 504 vs 7a.  If you’re looking to purchase commercial real estate or heavy machinery/equipment, the SBA 504 loan is often the best choice. If purchasing a business or getting working capital is the goal, the SBA 7A loan may be a better loan option for you.

With an SBA 504 loan, money can be used to buy a building, finance ground-up construction or building improvements, or purchase heavy machinery and equipment.  An SBA 7a loan can be used for short-term or long-term working capital and to purchase an existing business, refinance current business debt, or purchase furniture, fixtures and supplies.

SBA 504 Loan vs. SBA 7(a) Loan At-A-Glance Comparison

SBA 504 Loan SBA 7(a) Loan
Loan size
  • Minimum – $125,000
  • Maximum – $20 million +
  • Minimum – $125,000
  • Maximum – $20 million +
Interest rate Fixed Predominantly variable; some fixed-rate options
Terms
  • 25 years – real estate
  • 20 years – real estate
  • 10 years – equipment
  • Up to 25 years – real estate
  • Up to 10 years – business acquisition, equipment
  • 5 to 7 years – working capital
  • Weighted average for mixed-use requests
Down Payment 10% Borrower Minimum 10% borrower (often 20-30%)
SUCCESS STORY/SBA 504
Restauranteur uses SBA 504 to shift from paying rent to building ownership
SUCCESS STORY/SBA 504
Sushi restauranteur values the benefits of building ownership for her Business
SUCCESS STORY/SBA 504
Multiple SBA 504 loans propel growth for while keeping operational costs stable.

Pick the right small business loan for you – SBA 504 vs SBA 7a

Check out our FAQ below to learn about the key differences between SBA 504 and 7A loans and when they’re best used.

An SBA 504 loan is commercial real estate financing for owner-occupied properties. These loans require only a 10 percent down payment by the small business owner and funding amounts range from $125,000 to $20 million.

On the other hand, SBA 7a loans can be used to buy a business or obtain working capital. The maximum loan for an SBA 7a loan amount is $5 million.

A 504 loan’s interest rate is fixed, and no outside collateral is required. Also, fees are lower compared to a 7a loan.

Currently, 504 loans are amortized over 20 years, and as of April 2018 they began accepting applications for 25-year term SBA 504 loans.

The interest rate on a 7a loan, however, can be adjustable and tied to the prime interest rate. Collateral is required, at 90 percent. These loans are amortized over 25 years.

Here’s some history and more specifics on each program: The SBA 504 loan program was designed for small businesses to finance commercial real estate or large equipment for use in business operations.

The 7a loan program was originally designed for higher-risk loans for things like the acquisition or starting of a business, working capital, or furniture and fixtures and leasehold improvements.

When there are multiple partners and one partner has more assets and equity in their home than the other, an SBA 504 loan may be the best option.

Again, an SBA 504 loan does not take a lien on any outside collateral or a home whereas a 7A loan does. If a 7a loan is used in this scenario, it becomes unfair to the more asset-rich partner.

Fees on 7a loans tend to rise with the project size. For example, the guarantee fee for a loan over $700,000 is 3.5 percent — for a project up to $1 million. When the project exceeds $1 million, the rate jumps to 3.75 percent.

However, with the 504 loan, the fees involved stay flat as a percentage whenever the loan amount increases. On a $1.25 million commercial real estate project, the fees for a 7a loan can top $27,891, while the fees for a 504 loan are just over $13,306.

Also, the down payment required for the $1.25 million 7a loan would be $187,500 while the down payment for the SBA 504 loan would be $125,000. In this scenario, there’d be a $77,085 out-of-pocket savings to the borrower if the property was financed with a 504 loan.

Most borrowers go to their bank first when looking to finance real estate, so they may only be offered a 7a option. Once they start to do some research, they’ll usually find out about the 504 program.

When a business purchase is being combined with a real estate purchase and there is a need to borrow working capital a SBA 7a loan may be a better option. All of these can be rolled into one SBA 7A loan. SBA guidelines forbid using 504 loans to finance a business purchase or for working capital.

Yes, this is possible.

However, the 7a option would be more expensive as it relates to the SBA guarantee and SBA fees.

Also, banks are not supposed to finance those fees with the loan proceeds, so there is a much more expensive up-front cost with 7a loans.

Here’s a hypothetical situation:

For projects where the property price combined with tenant improvement exceeds $775,000 — the dollar-cost difference is dramatic.

In this case, the fee for the 504 loan would be 1.2 percent of the total loan compared to 2.9 percent for the 7a loan.

What’s more, if the 7a loan is financed at 90 percent loan to value (LTV), there is usually a lien on the home, the business (UCC), or both.

SBA 504 loans do not require any liens on personal residences.

Borrowers tend to think 504 loans are more complicated and harder to qualify for compared to 7a loans. Also, they often view the 504 loan prepayment penalty as onerous.

Those are all misconceptions. First, the lending process for a 504 loan is similar to that of a bank loan. And it may actually take longer for a 7a applicant to be approved since outside collateral is required by the program. That’s not required from 504 borrowers.

Lastly, the prepayment penalty for 504 loans is less expensive than the 7a in fees and the prepayment amount. The exception: when the 504 borrower prepays in a year’s time.

Borrowers are typically concerned that the process will be long and difficult because they will need approval from the bank, CDC, and the SBA.

Rest assured, if you provide a complete financial package, you’ll be able to meet any reasonable deadline these parties may have. And the timing will be no different if you decided to go with a conventional loan or a 7a loan.

See all FAQs

Comparison details for Lenders

SBA 504 Loan SBA 7(a) Loan
Eligible Business Size
  • Business net worth not to exceed $15 million
  • Average net profit after taxes for 2 consecutive years not to exceed $5 million
  • Determined by industry type
  • Annual sales not to exceed range of $750,000 to $33.5 million for retail, service and agriculture
  • Number of employees not to exceed range of 100 to 1,000 for wholesale and manufacturing
Loan Structure
  • 50% bank loan
  • 40% CDC loan
  • 10% borrower down payment
  • Loan structure negotiable; dependent on risk
  • 10% down payment (minimum)
Proceeds Use
  • Purchase existing building
  • Land acquisition and ground-up construction (can include soft cost development fees)
  • Expansion of existing building
  • Finance building improvements
  • Purchase equipment
  • Expand, acquire or start a business
  • Purchase or construct real estate
  • Refinance existing business debt
  • Buy equipment
  • Provide working capital
  • Construct leasehold improvements
  • Purchase inventory
Program Requirements
  • 51% owner occupancy for existing building
  • 60% owner occupancy for new construction
  • Equipment must have minimum 10-year economic life
  • 51% owner occupancy for existing building
  • 60% owner occupancy for new construction
  • All assets financed must be used to the direct benefit of the business
Collateral
  • Generally, project assets being financed are used as collateral
  • Personal guaranties of the principal owners of 20% or more ownership are required
  • Subject assets acquired by loan proceeds
  • Pledge of personal residence unless bank can justify why unnecessary
  • Personal guaranties of the principal owners of 20% or more ownership are required
Fees
  • Fees are financed in the 504 loan
  • Fees are negotiated for the 50% bank loan
  • Servicing fee (lowest allowed by SBA) for CDC plus a legal review fee
  • Fees can be financed in the 7a loan
  • Fees vary with the size of loan paired with 504 loan
  • Additional .25% charged on any loan portion above $1 million
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