In short, SBA 504 loans can be used to buy real estate, finance construction or building improvements, or purchase heavy machinery and equipment. On the other hand, 7a loan proceeds are used for short-term or long-term working capital and to purchase an existing business, refinance existing business debt, or purchase furniture, fixtures and supplies. There are varying terms and conditions for these two loans – the following is a side-by-side comparison of what each loan provides.
The Difference Between 7(a) and 504 loans.
|7(a) - For General Business Purposes||CDC/504 - For Real Estate and Equipment|
|Loan Size||Up to $5 million||$125,000 to $20+ million|
|Interest Rate||Predominately variable with some fixed rate options||Fixed|
|Terms||Up to 25 years – real estate. Up to 10 years – business acquisition, working capital, and other business needs.||20 years for Real Estate. 10 years for Equipment.|
|Down Payment||Varies by loan type||10% borrower|
|Eligible Business Size||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.||Net worth not to exceed $15 million. Average net profit after taxes for 2 consecutive years not to exceed $5 million|
|Loan Structure||Loan structure varies based on use of proceeds.||50% Bank Loan / 40% CDC Loan / 10% Borrower Down Payment|
|Proceeds Use||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.||Purchase existing building. Land acquisition and ground-up construction (can include soft cost development fees). Expansion of existing building. Finance building improvements. Purchase equipment.|
|Collateral||Subject assets acquired by loan proceeds. Personal guaranties of the principal owners of 20% or more ownership are required. Outside collateral may be required based on loan type.||Project assets being financed are used as collateral. Personal guaranties of the principal owners of 20% or more ownership are required.|