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Which Is Right for Your Business?
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The U.S. Small Business Administration offers government-backed loans to help small and medium-sized businesses get the financing they need to achieve a variety of goals, whether they want to invest in inventory, purchase equipment or supplies, or hire new workers so they can continue to grow and prosper. The two most common types Small Business Administration Loans Known as 504 loans and 7(a) loans. While SBA loans have higher maximum loan amounts, 7(a) loans have a wider range of potential uses.
Main points
- SBA 504 loans are typically used to purchase fixed assets such as real estate and equipment.
- SBA 7(a) loans are more versatile and can be used for a variety of possible business purposes, including working capital and refinancing existing business debt.
- When choosing between SBA 504 and 7(a) loans, it’s important to understand your business’s specific needs.
What is an SBA 504 loan?
SBA 504 Loans Designed for small businesses requiring up to $5 million in long-term financing. The loans can borrow up to $5.5 million for small manufacturers or specific energy projects. These loans are fixed interest rate.
arrive Qualify for an SBA 504 loansmall businesses must:
- Operate as a for-profit corporation within the United States
- Reported tangible net worth less than $15 million
- Average net income after federal income taxes for the two years preceding filing is less than $5 million
SBA 504 loan repayment terms can last 10, 20, or 25 years.
What is an SBA 7(a) loan?
SBA 7(a) loans are available to small companies in need of growth financing, including the purchase of machinery and equipment, improvements to real estate or buildings, or as working capital. The maximum loan amount for these loans is $5 million, but loans issued through SBA Express and Export Express delivery methods are capped at $500,000.
To qualify for an SBA 7(a) loan, a small business must:
- Operate as a for-profit corporation within the United States
- Meet SBA size requirements, smaller scale
- Does not belong to the unqualified enterprise type
- yes reputable and have funds to repay the loan
- Unable to obtain similar financing elsewhere
SBA 7(a) loans have a maximum term of 25 years.
Key Differences Between SBA 504 and 7(a) Loans
While SBA 504 and SBA 7(a) loans have similar loan amounts and longer repayment terms, there are some key differences between the two loan types.
Purpose and use of funds
SBA 504 loans can be used for assets that promote business growth or create jobs, but cannot be used for working capital. Overall, 7(a) loans offer a broader range of potential uses, including promoting job and business growth, Refinance Debt, working capital, changes in company ownership, and more.
loan amount
SBA 7(a) loan amounts are available up to $5 million. SBA 504 loans typically have a maximum limit of $5 million, but some borrowers can get up to $5.5 million.
Interest rates and fees
interest rate According to the SBA, SBA 504 loans are indexed to an increment above the current market interest rate on the 10-year U.S. Treasury note. In fiscal year 2025, an annual service fee of 0.331% will be charged. SBA lenders may also charge their own fees.
Interest rates on SBA 7(a) loans vary by borrower and lender, but certain maximum rates apply based on the loan amount.
| loan amount | maximum rate |
| US$50,000 or less | Base interest rate plus 6.5% |
| $50,001 to $250,000 | Base interest rate plus 6.0% |
| $250,001 to $350,000 | Base interest rate plus 4.5% |
| Over $350,000 | Basic interest rate plus 3.0% |
SBA 7(a) loans may require you to pay an SBA guarantee fee upfront. An annual service fee also applies, but is paid by the lender and cannot be passed on to the borrower.
Collateral requirements
With an SBA 504 loan, the asset being financed (real estate, equipment, etc.) serves as Collateral For a loan. For SBA 7(a) loans, collateral may or may not be required, depending on the loan amount and delivery method.
repayment terms
SBA 504 loans have repayment terms of 10, 20, or 25 years. Meanwhile, the maximum repayment term for an SBA 7(a) loan is 25 years.
Can SBA 7(a) loans be used to refinance existing debt?
Yes, SBA 7(a) loans can be used to refinance existing business debt. SBA 504 loans cannot be used for this purpose.
Are there prepayment penalties for SBA 504 or 7(a) loans?
Both 7(a) loans and SBA 504 loans come with Prepayment penalty This can apply to certain loan amounts and terms. For example, a prepayment penalty may be imposed on 7(a) loans with maturities of 15 years or longer if the borrower prepays 25% or more of the outstanding loan balance within the first three years after the date of initial loan disbursement. In this case, the prepayment fee is equal to 1% to 5% of the prepayment amount, depending on the year of prepayment.
How long does it usually take to get approved for an SBA 504 or 7(a) loan?
The U.S. Small Business Administration has not released a funding schedule for SBA 504 loans. For 7(a) loans, SBA turnaround time For some loan types, it can be as fast as 5 to 10 days.
bottom line
The SBA offers different types of funds for different purposes, which means you should carefully compare your borrowing options before moving forward. Consider how much money your business will need, what you will need to do with the funds, and how long it will take you to repay the funds. From there, you can narrow down the type of small business loan that fits your goals.
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