If you are considering taking out a small business loan, you will find there are several options to consider—two of the most popular SBA loans, including the SBA 504 and the 7a. If you plan to purchase heavy equipment or machinery, or commercial real estate, the SBA 504 loan may be the best option. However, if you want to purchase a business or working capital, the SBA 7A loan may be a better option.
When you take out an SBA 504 loan, you can use the funds to purchase a building, finance construction, building improvements, or purchase heavy equipment and machinery. With the SBA 7a loan, you can use the funds as long- or short-term working capital. These funds can be used to purchase supplies, fixtures, or furniture, refinancing business debt, or purchasing an existing business.
The Main Differences between SBA 7a and 504 Loans
The SBA 504 loan is a type of commercial real estate financing. It is offered for owner-occupied properties. A 10% down payment is required to get this loan, and the funding range is $125K to $20 million. With 504 loans, interest rates are fixed, and no additional collateral is needed.
The 7a loans are used for purchasing a business or for working capital. The maximum loan amount for these is $5 million. This loan is amortized for 20 years, and the interest rate is often adjustable, tied to the prime interest rate. You must have collateral that equates to 90% of the total loan amount.
When to Choose the SBA 504 Loan
If you are dealing with several partners, and one partner owns more assets or has more equity in their home than the others, then the SBA 504 loan could be a better option. There is no lien placed on collateral with the 504 loans. If you chose the 7a loan, then the person with the most assets would also have the most at-risk. This could create an unfair scenario.
Choosing the Right SBA Loan
When you need financing, you have several options from the SBA. It is up to you to become educated about your options and choose the one that makes the most sense for your situation. While this may seem challenging, using the information here will help ensure you get the desired results. Knowing what options you have will ensure you can get the funding needed for your business’s growth and success.