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SBA 504 vs. 7(a) Loans: What's the Difference?

SBA 504 vs. 7(a) Loans: What's the Difference?
Lauren Ward
Lauren WardUpdated May 4, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
One of the biggest challenges in taking out a small business loan is figuring out which loans you want to apply for. The Small Business Administration (SBA) offers a variety of financing opportunities for small businesses that might not get approved for other types of loans. When you look at SBA loans vs. conventional business loans, you’ll see that the former typically come with more competitive rates and terms because the federal government guarantees a portion of the loan funds. But even within the category of SBA loans, there are significant differences. Here we’ll look at two popular SBA loan programs: the 504 loan and the 7(a) loan. Both offer high maximum loan amounts, but they vary when it comes to how you apply and how you can use the loan funds. SBA 504 vs. 7(a) Loans
Feature504 Loans7(a) Loans
Maximum loan amount$5 million$5 million
Use of fundsPurchasing, improving, or modernizing buildings, land, facilities, etc.Working capital, inventory, debt consolidation or refinancing, etc.

What Is an SBA 504 Loan?

The purpose of an SBA 504 loan is to provide financing for small businesses to use toward fueling job growth in their local communities. Loans are available up to $5 million. The application process is unique in that it goes through a certified development corporation (CDC). A CDC is an SBA-approved organization that provides 40% of the loan from SBA funds, then sells 50% of the loan to a third party financial institution. The borrower provides the remaining 10% for the project. 504 loan interest rates are low compared to other types of financing. Repayment terms can last 10 years, 20 years, or 25 years. Eligible uses for the funds include:
  • Purchasing or constructing buildings, new facilities, or equipment
  • Improving or modernizing existing facilities, land, streets, or parking lots
Borrowers may not use 504 loans for inventory, working capital, or debt consolidation.Recommended: SBA Loan Rates

What Is a 7(a) Loan?

SBA 7(a) loans are the most common type of SBA loans. The maximum loan amount is $5 million and the funds may be used for a broad range of purposes, including:
  • Real estate
  • Working capital
  • Debt refinancing
  • Purchase of supplies, furniture, and fixtures
Real estate loan repayment can extend as long as 25 years, while all other 7(a) loans last up to 10 years. The SBA guarantees the majority of the loan, but you apply for it directly with a lender. The loan approval process typically speeds up if you choose an SBA Preferred Lender, because these lenders have a positive history processing SBA loans. In addition to the standard 7(a) loan, there are other types available as well:
  • 7(a) Small Loan
  • SBA Express
  • Export Express
  • Export Working Capital
  • International Trade
  • CAPLines

Main Differences Between SBA 504 Loans and 7(a) Loans 

504 loans and 7(a) loans are two very distinct programs. It’s wise to understand the differences before you start the application process. 

Use of Funds

When it comes to how funds may be spent, 504 loans focus on job creation, while 7(a) loans are tailored for expanding business operations. With a 504 loan, you can use the funds for major expenditures, such as purchasing new buildings, land, or facilities. Alternatively, you can improve existing property. And 504 funds may also be used to purchase heavy equipment and machinery. A 7(a) loan may be used more broadly. Businesses may still purchase real estate and equipment with these funds. But the loan may also be used for working capital, inventory, and more. 

Application Process

The application process for 7(a) is very different from the process for 504 loans. A 7(a) loan is originated by a private lender. You may opt to work with an SBA preferred lender to expedite the process. A 504 loan, on the other hand, requires you to apply through an SBA-certified CDC. These community organizations specialize in economic development. Recommended: SBA Loan Requirements & Tips for Qualifying

Fees and Down Payments for SBA 504 Loans and 7(a) Loans

The SBA requires a guarantee fee on all loans, which is charged on the portion of the loan that is guaranteed by the federal government. You may also be charged lender fees as well as a down payment on the loan.

SBA 504 Loans

  • Down payment: The borrower must supply 10% of the loan amount as equity. An additional 5% is required for startups and/or for loans used for a special use property (such as a church, school, hospital, museum, etc.). Forty percent of the loan goes through the CDC using SBA funds, and 50% of the loan comes from a lender.
  • SBA Guarantee Fee: Currently set at 0.5% for the lender portion of the loan, plus up to 1.5% for the CDC portion. Ongoing fees may also apply. 

7(a) Loans

  • Down payment: The borrower must make a 10% down payment for the loan. 
  • SBA Guarantee Fee: From 0.52% to 3.75% on the lender portion of the loan depending on the size of your loan. 

SBA 504 vs. SBA 7(a) Loan: What’s Right for Your Business?

Choosing between an SBA 504 loan and a 7(a) loan may largely depend on how you plan to use the funds. 

When You Might Consider an SBA 504 Loan

A 504 loan should be used to expand or improve your business in a way that aids job growth. Because you apply through a CDC, which specializes in economic development, prepare to craft a business plan demonstrating this impact. Buildings, land, and facilities can either be purchased or modernized with 504 funds. Long-term machinery and equipment are also considered eligible expenses. If these guidelines align with your intentions, a 504 loan might be a good choice. However, bear in mind that you’re not allowed to use the funds for debt consolidation, inventory, or working capital. Those things might help grow your business, but likely won’t have substantial benefits for the local workforce.

When You Might Consider an SBA 7(a) Loan

There are far fewer restrictions on how you can use 7(a) loan funds. For instance, eligible expenses include both short-term and long-term working capital, making 7(a) loans preferable if you want to expand a business but your plans won’t meet the 504 job creation requirements. A 7(a) loan can also be used to acquire a new business or, alternatively, to purchase real estate for your company.

The Takeaway

Take your time so that you can evaluate all of the financing options for your business. As you examine SBA loan requirements and look at your needs, you may decide that neither a 7(a) nor a 504 is right for you. To get an idea of all your small business loan options or to apply for a small business loan online, check out Lantern by SoFi. Use its fast online search to get a personalized small business option in minutes.

Frequently Asked Questions

What's the difference between the 504 and 7(a) SBA loans?
Is an SBA Express loan a 7(a) loan?
Photo credit: iStock/Prostock-Studio

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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