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At First National Bank of Oklahoma, we understand that securing the right financing is crucial to the growth of your business. The Small Business Administration (SBA) offers two key loan programs that can help fund your business’s expansion: the SBA 504 loan and the SBA 7(a) loan. Each loan program serves a different purpose, and understanding the differences between them can help you make the best decision for your needs. Let’s take a closer look at these two options.
Purpose of the Loans
The primary difference between the SBA 504 vs. SBA 7(a) loans lies in how they can be used.
- SBA 504 Loan:
The SBA 504 loan is designed specifically for businesses looking to acquire or improve long-term fixed assets like real estate, machinery, and equipment. This loan type encourages business growth, job creation, and economic development, making it ideal for businesses in need of significant capital to invest in their infrastructure. - SBA 7(a) Loan:
The SBA 7(a) loan is a more versatile option, allowing businesses to use the funds for a wide range of purposes, such as working capital, real estate, inventory, or even business acquisitions. The flexibility of the SBA 7(a) loan makes it suitable for many different business needs.
Loan Structure
The structure of the loans is a key differentiator, with the SBA 504 loan requiring involvement from multiple entities, while the SBA 7(a) loan is simpler and more direct.
- SBA 504 Loan:
The SBA 504 loan is split into three parts: 50% of the loan comes from a private lender or bank, 40% from a Certified Development Company (CDC) that is backed by the SBA, and the remaining 10% comes from the borrower as an equity contribution. For special-use properties, this equity contribution can go up to 15-20%. The involvement of the CDC adds a layer of complexity but helps keep costs low. - SBA 7(a) Loan:
The SBA 7(a) loan is a single loan directly from an SBA-approved lender. There is no CDC involvement, making the process quicker and simpler.
Loan Amounts
Both SBA loans can be significant, but the maximum loan amounts and funding capacities differ.
- SBA 504 Loan:
The SBA portion (funded through the CDC) is typically capped at $5 million, but this can increase to $5.5 million for energy-efficient or manufacturing projects. The total project cost can exceed $20 million when combining the CDC and private lender financing. - SBA 7(a) Loan:
The maximum SBA 7(a) loan amount is $5 million. The SBA guarantees up to 75% of this loan, making it more accessible for small businesses, but the total loan amount is lower compared to the SBA 504.
Interest Rates
Interest rates can greatly affect the overall cost of borrowing, and each loan type has its own structure.
- SBA 504 Loan:
The interest rate on the SBA 504 loan is typically lower than the SBA 7(a) due to the fixed rate on the CDC portion, which is tied to U.S. Treasury rates. The private lender portion may have variable or fixed market-based rates. - SBA 7(a) Loan:
Interest rates for SBA 7(a) loans can be either variable or fixed, depending on the lender, and are tied to the prime rate with an additional markup. While the rate is more flexible, it’s generally higher than the SBA 504.
Loan Terms
Loan terms vary based on the purpose of the loan and the type of asset being financed.
- SBA 504 Loan:
The SBA 504 loan offers longer terms for fixed assets, including real estate and equipment, with terms of 10, 20, or 25 years, making it a great option for long-term investments. - SBA 7(a) Loan:
The term for an SBA 7(a) loan can be up to 10 years for working capital, or up to 25 years for real estate, allowing flexibility depending on the use of funds.
Down Payment Requirements
Down payment requirements vary depending on the type of asset and the specific loan program. Let’s compare it for the SBA 504 vs. SBA 7(a) loans:
- SBA 504 Loan:
The SBA requires a minimum 10% down payment for the loan, but for special-use properties (such as gas stations or hotels), this requirement may increase to 15-20%. - SBA 7(a) Loan:
The down payment for an SBA 7(a) loan can range from 10% to 30%, depending on the lender and the specifics of the business and loan.
Collateral Requirements
Collateral requirements depend on the loan amount and the type of loan being used.
- SBA 504 Loan:
The asset being purchased (such as real estate or equipment) serves as collateral for the loan. No additional collateral is required beyond the asset being financed. - SBA 7(a) Loan:
Collateral is required for loans over $25,000 and may include business assets, real estate, or personal guarantees.
Eligibility & Qualifications
Both SBA loan programs have eligibility requirements, but they vary slightly in terms of business size, financial history, and goals.
- SBA 504 Loan:
Eligible businesses must be for-profit and have a net worth of $15 million or less, with average net income under $5 million for the last two years. Additionally, businesses must demonstrate their potential for job creation or meet specific public policy goals. - SBA 7(a) Loan:
Like the SBA 504 loan, the business must be for-profit and based in the U.S. It must also meet SBA size standards and show the ability to repay the loan and maintain good credit.
Application Process & Funding Time
The speed at which you can receive your funds varies depending on the loan type and the complexity of the application process.
- SBA 504 Loan:
The SBA 504 loan typically takes longer to process due to the involvement of both the lender and the CDC. The approval and funding process can take anywhere from 60 to 90 days. - SBA 7(a) Loan:
The SBA 7(a) loan typically has a quicker processing time, ranging from 30 to 60 days. SBA Express loans can speed up the process even further, with approval in as little as 36 hours.
The right loan for your business depends on your needs. Whether you’re focusing on fixed asset acquisition or require a more flexible funding option, First National Bank of Oklahoma is here to guide you through your choices. Our experts are ready to help you secure the right financing to drive your business’s success. Reach out today to explore which SBA loan is the best fit for your business. Our experts can guide you through the process and help you secure the funding you need to grow.
SBA 504 vs. SBA 7(a) Loans: Quick Comparison
| Feature | SBA 504 Loan | SBA 7(a) Loan |
| Purpose | Fixed asset purchases (real estate, equipment, etc.) | General-purpose loan (working capital, business acquisition, etc.) |
| Loan Structure | 50% from bank/private lender, 40% from CDC, 10% borrower equity | Single loan from SBA-approved lender, SBA guarantees up to 85% of loans ≤$150,000 and 75% of loans >$150,000 |
| Loan Amount | SBA portion capped at $5M ($5.5M for certain projects), total project cost can exceed $20M | Up to $5M, SBA guarantees up to 75% of loan amount |
| Interest Rates | Fixed rates on CDC portion, market-based rates from private lender | Variable or fixed, tied to prime rate + lender markup |
| Loan Terms | 10, 20, or 25 years for real estate, equipment, and fixed assets | Up to 10 years for working capital, up to 25 years for real estate |
| Down Payment | Minimum 10%, higher for special-use properties | 10% to 30%, depending on lender |
| Collateral Requirements | Purchased asset serves as collateral | Collateral required for loans over $25,000, may include business assets or personal guarantees |
| Eligibility | For-profit U.S. business, net worth <= $15M, avg. net income <= $5M | For-profit U.S. business, meets SBA size standards, good credit |
| Application Process | Longer (60-90 days), requires coordination between CDC and lender | Faster (30-60 days), express loans available for faster approval |
| Best Use Cases | Buying real estate, land, large equipment, facility renovation | Working capital, inventory, refinancing debt, business acquisition |