Choosing an SBA Loan: 504 or 7a?

One of the best ways to start your business is with an SBA loan and there are two main types designed to help start-ups, the 504 and 7a loan programs. The Small Business Administration can help back your loan, making it less risky for underwriters to approve your application as well as giving you access to higher dollar amounts.

Specifics and Histories

Each loan type offered by the Small Business Administration is designed to help in specific ways and were developed to fit the growing needs of the market. For instance, the 7a loan type was designed to help buying or starting a business as well as other high-risk loans. The 504 programs were developed to help small businesses finance large equipment or real estate purchases for business use.

Similarities and Differences

While both the 504 and 7a are SBA loan programs, there are more differences than similarities. The 504 loans are designed to help businesses finance owner-occupied real estate where the company in question occupies more than half of the property. For example, if you are looking at purchasing a strip-mall with five units to run your business out of and apply for a 504 loan, then you will need to occupy three of those units and can rent out the other two.

The 7a loan program, on the other hand, is designed to help your company get needed working capital or to purchase a business. These loans are usually at adjustable interest rates tied to the prime rate whereas the 504 are fixed, and with the 7a you will need outside collateral for the loan. These loan programs will have maximum amounts as well with the 504 being much higher than the 7a to aid in the purchase of commercial real estate.

Uses and Limitations

With both loan types, you will have some limitations on what you can and cannot use the funding for. The most common example is that you cannot take out a loan with the Small Business Administration to pay for your personal property which is never used in your business. You can use both loan types for real estate, working capital or start-up costs, but since the rates and amounts are different, some uses are better suited than others.

When you are looking for an SBA loan it is a good idea to research the types of loan programs offered and which one will be the best for your needs. This can usually be done with a quick trip to the website of the Small Business Administration to compare amounts, qualifications and limitations.


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