504 Loans vs. SBA 7(a)Loans
Most lenders that you speak with about low down payment or "SBA" financing will only mention 7(a) loans as an option and frequently don't say a word about 504 loans. There is a very good reason for this: 7(a) loans are in THEIR better interest, even if it isn't beneficial for you as a borrower. You see, if your proposed project only includes commercial real estate and/or equipment (you haven't added working capital in the loan request, for instance), then your lender stands to make more money by only offering and promoting the 7(a) loan program at the expense of the 504 loan program, despite even the SBA's admission that for commercial real estate and/or equipment, a 504 loan is hands-down, the best loan program for small businesses.
In addition, all of the negative publicity and budget wrangling over SBA programs for the last five years or so are entirely the result of issues within the SBA 7(a) loan program, NOT the 504 loan program. For an insightful article, please click on the following link to an article from the Wall Street Journal in February 2004:
Take the time to explore all of your options and call us with your questions or concerns. If your lender didn't tell you about a 504 loan, perhaps it's time you speak with someone that will. We will be happy to discuss your financing need at anytime.
The following is a detailed comparison of the two largest SBA financing programs.
| 504 Loans | SBA 7(a) Loans | |
| Project Size | $200,000 - $10,000,000 | $50,000 - $2,000,000 |
| Uses |
. Real Estate . Equipment |
. Real Estate . Equipment . Business Acquisitions . Working Capital |
| Interest rate | Choice of fixed or floating on 1st mortgage portion.
Fully amortized through term of loan. Below market, long-term fixed interest rate on 2nd mortgage portion, fixed for the entire 20 years. |
Floating rate based on Prime plus a spread. Maximum rate of 2.75% over Prime. |
| Term/Amortization |
20-25 years fully amortized. |
20-25 years fully amortized. |
| Down Payment |
10% of eligible project costs (borrowers can roll in renovations, closing and soft costs). *an extra 5% is required for start-ups or special use properties. |
20-30% for start-up or business acquisition. 10-20% for expansion. |
| Collateral |
Only the real estate and/or equipment being financed. |
Must be "fully collateralized," which frequently means a blanket lien filing on all assets of the business (A/R and inventory included, which makes getting a line of credit difficult) and the business owner's home. |
| Loan Fees |
Just were reduced and are always lower; usually averages about 1 - 1.25% of loan amount. |
Were just increased and are always higher; a tiered system is in place that quickly rises to about 3% of the guaranteed loan portion. |
| Technical Qualifications | For profit, non-public businesses with less than $7 million in tangible business net worth, averages less than $2.5 million in net income over the last 2 years, and personal, non-retirement, unencumbered liquid assets not to exceed total project cost. |
Various employee size, revenue and net income standards that differ from one industry to another. These complexities are too numerous to detail here, but in many instances, a small business can qualify for a 504 loan even though it would not qualify for a 7(a) loan. |
