SBA 7(a) vs. SBA 504 Loans: Which One Fits Your Business?

The SBA 7(a) and SBA 504 programs are the U.S. Small Business Administration's two best-known loan programs. In both, the SBA doesn't lend the money directly: it backs loans made through approved lenders, which lets those lenders offer longer terms than they otherwise would. The big difference is what the money can be used for.

SBA 7(a) loans: the all-purpose option

The 7(a) program is the SBA's main and most flexible loan. Loans go up to $5 million and can be used for most business purposes:

• Working capital and inventory
• Equipment and furniture
• Buying an existing business or a partner's share
• Refinancing eligible business debt
• Buying, building or renovating owner-occupied commercial real estate

Rates are tied to the prime rate with SBA-set maximums, and terms run up to 10 years for working capital and equipment and up to 25 years for real estate.

SBA 504 loans: built for big fixed assets

The 504 program finances major fixed assets that help a business grow and create jobs, mainly owner-occupied commercial real estate and long-life equipment. It can't be used for working capital or inventory.

A 504 loan is split between three parties. A typical project is funded about 50% by a bank, about 40% by a Certified Development Company (CDC) through an SBA-backed loan, and about 10% by the business. The CDC portion carries a long-term fixed rate.

Side by side

• Use of funds: 7(a) covers almost any business purpose; 504 covers fixed assets like real estate and heavy equipment only
• Structure: 7(a) is one loan from one lender; 504 combines a bank loan and a CDC loan
• Down payment: 7(a) varies by use, often around 10% for startups and acquisitions; 504 is typically 10%, more for startups or special-purpose buildings
• Rates: 7(a) is usually variable and prime-based; the 504 CDC portion is fixed
• Best for: 7(a) suits working capital, acquisitions and mixed needs; 504 suits buying or building your own building

Which should you choose?

If you need working capital, want to buy a business, or have a mix of needs, the 7(a) is usually the fit. If you're buying or building a property your business will occupy, or buying major equipment, compare a 504: the fixed rate on the CDC portion can make long-term payments more predictable.

Both programs share core eligibility rules: a for-profit U.S. business that meets SBA size standards, a sound business purpose, the ability to repay from cash flow, and owners with acceptable credit.

Next steps

GoSwiftFund connects businesses with SBA 7(a) lending partners for loans from $30,000 to $5,000,000. Checking your options is a soft inquiry, so your credit score isn't affected.