If you’re a small business owner, you’ve probably seen financing options from the Small Business Administration (SBA). SBA’s 504 and 7A loans are two of the most popular loan programs. We’ll discuss the similarities and differences between the two and how to decide which one is right for your business.
Which one is right for your business?
504 Credits in Foundations
If you are interested in applying for a 504 loan, the first thing you should do is visit your local Certified Development Company (CDC). 504 loans are only available through CDCs, which are SBA’s community partners. A 504 loan is a fixed-rate, long-term financing that, for example, can be used to finance the purchase of important assets such as buildings, land, machinery, or equipment. Funds cannot be used for working capital or inventory, debt consolidation, repayment or refinancing, or rental property investment or speculation. SBA provides an online application checklist for its 7A loan program and a repository of authorization documents for the necessary documents for 504 loan applications.
7A Credit Principles
According to the SBA 7A Loans is the agency’s most popular loan program. Loan terms vary by loan program – it offers different types of loans under the 7A umbrella:
- Standard 7A: Maximum loan amount of $5 million
- 7A Small Loans: Maximum Loan Amount of $350,000
- SBA-Express: Fast processing time, application response within 36 hours
- Express Export: Provides an easier way for exporters and lenders to access SBA-backed loans and lines of credit financing
- Export Working Capital: Aims to assist companies in export sales by providing working capital
- International trade: Long-term financing for companies that need to expand or renew to compete with foreign firms due to increased export sales
- Preferred Lenders: Selected lenders can process, close, service and liquidate loans guaranteed by the SBA.
- Veteran Advantage: Veteran-owned small business loans have lower fees.
- CAP Lines: Designed to help companies meet their short-term and cyclical working capital needs
- SBA does not lend itself, but strives to match borrowers with lenders. The SBA works with a variety of lenders to develop lending guidelines and reduce their risk, while making it easier for small businesses to find financing.
When deciding whether a SBA 504 Loans or 7A loan is a better fit for your business, ask yourself how much financial assistance you are looking for, what you plan to use the funds for, how your business is financially doing, and a timeline of your funding sources. If you’re looking for long-term, fixed-rate financing to create jobs and grow your business, a 504 loan may be your best bet. These loans are for companies in need of buildings, land, roads, utilities, parking lots, landscaping or facilities and investments in vital machinery and equipment. However, 504 loans have restrictions on how the funds can be used. You should not apply for a 504 loan if you are looking for:
- Working capital or inventory loan
- Funds for debt consolidation, repayment or refinancing
- Finance available for speculation or investment in rental properties
- A salary calculator can help you estimate your payments and determine which loan is best for your business.
The SBA 7A loan program is a great option for small businesses looking for shorter financing times. For example, the application response time for an SBA Express loan is 36 hours. The 7A program also offers a variety of options tailored to specific business needs. For example, if you’re a senior or involved in international trade, you can take advantage of specific credits that suit your business.
How do you refinance an SBA 7A loan?
To refinance an SBA 7A loan, a company must meet the following requirements:
- Original credit usage must be SBA eligible.
- Loan proposals must provide significant benefits to borrowers, including at least 10% lower payouts than current loans.
- A written statement of the letter of credit and a statement of the reason why the current letter of credit does not meet the reasonable conditions.
- What is the maximum term for SBA 504 and 7A loans?
- SBA 504 loans are available in terms of 10, 20, and 25 years. SBA 7A loans have a maximum term of 25 years for real estate loans and 10 years for equipment, working capital, or inventory loans.
- What is the minimum line of credit you need to get an SBA loan?
- While the SBA uses credit history to determine the eligibility of companies seeking credit, it is possible for even companies with poor credit ratings to receive seed funding.