SBA 7a vs SBA 504: Which One is Best for Your Business?

Starting a business is a challenging task, but getting the right funding is even tougher. Securing funding is one of the crucial steps towards establishing a successful business. However, with so many financing options available, it can be challenging to choose between them.

Suppose you're trying to secure funding for your business, and you're weighing the options between SBA 7a and SBA 504. In that case, this blog post is for you. Let's dive into the differences between SBA 7a vs. SBA 504 loans and how to choose the best one for your business.

1. Loan Amount

One of the significant differences between SBA 7a and SBA 504 loans is the loan amount. SBA 7a loans range from $500,000 to $5 million, whereas SBA 504 loans typically range from $125,000 to $20 million.

 The SBA 7a loan offers small businesses flexible financing with more lenient requirements. This is an excellent option for businesses looking for smaller amounts of funding.

On the other hand, SBA 504 loans provide long-term, low-rate financing specifically for the acquisition of fixed assets such as land, buildings, and equipment.

2. Eligibility Requirements

The eligibility requirements for SBA 7a and SBA 504 loans also differ. SBA 7a loans are open to small businesses that meet SBA size requirements. Generally, the business must have fewer than 500 employees and less than $7.5 million in tangible net worth or $2.5 million in average net income over the previous two years.

SBA 504 loans are for businesses looking to purchase fixed assets and meet specific requirements, such as the business owner occupying 51% or more of the building acquired with the loan, and the business must show the ability to repay the loan.

3. Interest Rates and Fees

Interest rates and fees also differ between the two loans. Typically, SBA 7a loans have higher interest rates but lower fees, while SBA 504 loans have lower interest rates but higher fees.

The interest rate for 7a loans usually ranges from 7% to 9%, while the interest rate for 504 loans is around 4%. Meanwhile, the fees for 7a loans range from 2.25% to 4.75%, while the fees for 504 loans range from 1.5% to 3.5%.

4. Use of Funds

SBA 7a loans are versatile, making them an excellent option for businesses that need more flexibility around the use of funds. These loans can be used for a variety of business purposes, including working capital, inventory purchases, or refinancing existing debt.

In contrast, SBA 504 loans can only be used to purchase fixed assets like buildings, machinery, or equipment. Businesses must purchase or refinance fixed assets with SBA 504 loans to be eligible.

Choosing between SBA 7a vs. SBA 504 loans depends on your business's unique circumstances and needs. The right loan will depend on your business's size, what you plan to use the funds for, and your repayment ability. It's essential to consult with a financial expert before making a decision to ensure that you get the right funding for your business.