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What is the difference between 504 and 7(a) SBA Loans?

When businesses are looking to take out an SBA loan for their small business, they have many options. Two of the most popular options are called 504 loans and 7a loans. It can be difficult to know which is right for your business–let’s take a look at the benefits, drawbacks, and features of each one.

The Basics of a 7a SBA Loan

Typically, the 7a loan provides greater flexibility than the 504. 7a loans offer a maximum payout of $5 million and technically have no minimum amount (though they typically start around $25,000-$30,000). These loans also offer variable rates and can include loan guaranteed percentages based on the amount of the loan–lower loans offer higher guarantees.

The length of a 7a SBA loan may also differ slightly from 504 loans. All 7a borrowers will need to put cash into their deals, as 100% financing is very rare. New businesses are required to offer a certain percentage as a down payment through the Small Business Administration. Business owners may offer up several assets as collateral to secure the loan, including property, automobiles, or stock options, though the 7a loan isn’t limited based on the borrower’s available collateral.

The Basics of a 504 SBA Loan

The 504 loan is for long-term fixed assets with a useful life of no less than 10 years. These loans are typically larger, as qualifying businesses can borrow dollar amounts from $125,000 up to as much as $10 million. A 504 loan is actually two loans; a conventional first mortgage and an SBA second mortgage.

Typical repayment terms on the second mortgage is 25 years (the first mortgage is not) and the second mortgage has a rate that is fixed for the life of the loan. Of course, these loans are based on the business’s needs and whether or not they qualify for the loan.

Borrowers of SBA 504 loans are often expected to put forth a down payment of ten percent of the loan as well as offer collateral. The loans come with a fixed interest rate that is fully amortized over the length of the loan. Repayment periods are typically 10 to 20 years.

Which Loan is Best for Your Business?

Choosing between these two loans is not always a simple decision. There are a few options you should keep in mind when deciding which loan is right for your small business:

The Purpose of the Loan

Are you starting a new business or expanding on an existing business? If you are looking for startup funds or working capital for your business, a 7(a) might be a good choice. If you need help securing funds for larger, lasting business expenses, you might be better served with a 504 loan. 

The Loan Amount

The amount of money you are looking to borrow is another large factor. Smaller amounts might be better suited (or only available) with a 7(a) loan. Larger investments and purchases match best with the terms of a 504 loan. 

Loan Terms

Finally, examine the terms of each loan. What are the interest rates? What collateral options do you have available? How much time does your business have available to invest in a loan? These decisions will all factor in your loan choice. 

The 504 loan product and the 7a both have a 25-year term and amortization. However, with a 7a loan, borrowers can roll other business-related needs into that 25 year term.

Still not sure which loan option is best for your small business? Falcon National Bank is a Preferred SBA Lender and can help you navigate the best option for your company–both today and for the future.