Applying for a small business loan is often a stressful process. It can be confusing to navigate the application process and the sheer volume of options available may feel overwhelming.
The Small Business Administration (SBA) was established to support owners and entrepreneurs with a variety of programs designed to help build and grow businesses. Two of the most popular are the SBA 504 and SBA 7(a) loan programs. But it’s sometimes hard to differentiate between the two programs, and an SBA loan isn’t right for everyone.
Here, we’ll outline the key differences between SBA 504 and 7(a) loans, the benefits your business may enjoy with a small business loan, and why partnering with an experienced lender like Team Financial Group for your equipment financing might be an even better option.
SBA 504 and 7(a) Loans: The Essentials
The 7(a) Loan Program is the SBA’s most common loan program and is often used when commercial real estate is included in the purchase of a business. According to the SBA, it also is used to provide help with:
- Short and long-term working capital
- Revolving funds based on the value of existing inventory and receivables
- The purchase of equipment, machinery, furniture, fixtures, supplies, or materials
- The purchase of real estate, including land and buildings
- New construction
- Existing building renovations
- Establishing a new business or assisting in existing business acquisition, operation, or expansion
- Refinancing existing business debt
SBA 504 loans, meanwhile, are available through Certified Development Companies (CDCs), which are often nonprofit corporations that serve their local communities and are regulated by the SBA. SBA 504 loans are targeted at business growth and job creation. This can be accomplished in a variety of ways, including:
- The purchase or construction of existing buildings or land, new facilities, or machinery and equipment
- The improvement and modernization of existing facilities, land, streets, utilities, parking lots, or landscaping.
You should note that a 504 loan cannot be used for working capital, inventory, consolidating, repaying, or refinancing debt, or rental real estate.
It’s also important to point out that the SBA doesn’t lend directly to small business owners. Instead, the SBA helps businesses obtain both loan types by partnering with lenders and agrees to repay a portion of the loan if the business defaults. That means you’ll need to meet both the SBA’s eligibility criteria and the bank’s requirements to qualify for a loan.
What Are the Differences Between 7(a) and 504 Loans?
The SBA sets guidelines that are intended to both reduce risk for lenders and make it easy for small businesses to access capital. Here’s a quick breakdown of the differences between 7(a) and 504 loans:
Maximum Loan Amounts
- 7(a) loans: $5 million.
- 504 loans: $5 million.
To qualify for a 7(a) loan, your business must:
- Operate as a for-profit company in the United States
- Be considered a small business, as defined by the SBA
- Have reasonable invested equity
- Use alternative financial resources, including personal assets, before seeking assistance
- Demonstrate a need for a loan
- Use funds for a sound business purpose
- Not be delinquent on any existing debts to the U.S. government
As a 504 loan borrower, your business must:
- Operate as a for-profit company in the United States
- Have a tangible net worth of less than $15 million
- Have an average net income of less than $5 million after federal income taxes for two years prior to your loan application
- 7(a) loans: Available as fixed or variable rates and subject to SBA-established maximums.
- 504 loans: Fixed-rate financing that often is approximately 3% of the debt.
Terms and Conditions
- 7(a) loans: Most are repaid with monthly payments of principal and interest. Payments stay the same for fixed-rate loans. For variable-rate loans, lenders may require different payments if the interest rate changes.
- 504 loans: 10-, 20-, and 25-year terms are available.
Alternatives to SBA Loans
SBA loans are a great option, but they aren’t right for every small business. The requirements for 7(a) and 504 loans can be hard to meet, especially if you don’t have collateral to secure your loan. We’ve seen businesses with strong revenue streams and business plans get denied by the banks. And some business owners are unwilling to put liens on their personal property (like their homes) in exchange for an SBA loan.
But that doesn’t mean that you don’t need financing for equipment and other improvements.
If you’re looking for flexible alternatives to a 7(a) or 504 loan, Team Financial can help. We offer fast, flexible options for equipment financing, including EFA/$1 buyout leases and FMV leases. And because we’re not a bank, we can take a more holistic approach when assessing your eligibility for financing.
When we evaluate a small business’ financing options, we look at many factors: your credit history, debt service coverage ratio, your business’ financial health, and industry conditions. Our goal is to help your business grow and thrive, so we will also provide you with feedback on your application quickly.
Contact Team Financial Group to Learn About Your Equipment Financing Options
Need help figuring out which financing option makes sense for your business plan or whether you should apply for an SBA loan? We can help. We specialize in offering fast and flexible equipment financing for a wide range of small businesses.
Call Team Financial Group today at 616-735-2393 or fill out our contact form to talk with a financing expert. If you’re ready to apply for financing, fill out our short online application and we’ll get the process started.
7(a) loans. (n.d.) Small Business Administration. Retrieved from: https://www.sba.gov/funding-programs/loans/7a-loans
504 loans (n.d.) Small Business Administration. Retrieved from: https://www.sba.gov/funding-programs/loans/504-loans
The content provided here is for informational purposes only. For personalized financial advice, please contact our commercial financing experts.