SBA Loans CDC/504 and 7(a) Comparison
The Small Business Administration (SBA) aims to help American business owners get financing at favorable rates and terms. The SBA backs them up so those small businesses can focus on creating more jobs and help expand the U.S. economy.
Without a shadow of a doubt, an SBA loan is the smartest and most affordable way to get financing for a business.
The truth is, all business owners would love to get a loan from the SBA because of their long terms and low interest.
If you want to apply for one, keep in mind that the SBA has different types of loan programs. Which one you choose will depend on your business’ funding needs.
In this article, we will compare two of the most popular loan programs from the SBA, the 504 and the 7(a).
The SBA 7(a) loan
The 7(a) is the SBA’s most common loan program because of its long repayment terms and low-interest rates. Also, you can use the 7(a)’s proceeds for almost any business purpose. These loans are made for small business owners that might require up to $5 million in working capital to inject into their business.
You may use the proceeds from a 7(a) loan to cover your working capital needs, including:
- Equipment and real estate purchases
- Refinance existing business debt
- Purchase inventory
- Buy a business
7(a) loan terms- Up to 10 years for working capital, and up to 25 years for commercial real estate properties.
Max. Loan amount- Up to $5,000,000
Collateral? – 7a loans don’t have to be fully collateralized.
7(a) loan eligibility criteria – Your credit score should be above 680, you should not have any recent bankruptcies or foreclosures, you must do business within the United States territory, and have sufficient equity on your business.
Would you like to know if your business qualifies for an SBA loan?
SBA CDC/504 loan
The SBA’s 504 loan program is the best choice when purchasing fixed assets such as real estate or equipment. The 504 loan program provides approved small businesses long-term (10 to 20 years) and fixed-rate interests.
The SBA doesn’t do the lending themselves. Instead, 504 loans are made available through a Certified Development Company (CDC). These CDCs are certified and regulated by the Small Business Administration through their community-based partner program.
You may use the proceeds from a 504 loan for fixed assets, including:
- Buying land,
- Buying commercial buildings,
- Building a new facility,
- Making improvements to your current facilities,
- Construction or renovation
- Purchasing machinery and equipment.
504 loan terms – Up to 20 years for real estate, and up to 10 years for equipment.
Max. Loan size – Up to $5,000,000
Collateral? – The assets being financed will be used as collateral. Personal guarantees from the business owner could also be required.
504 loan eligibility criteria – Your business must operate within the United States territory, be a for-profit business, fall within the SBA’s company size standard, average a net income of $5 million or less after federal income taxes, and have a tangible net worth less than $15 Million Dollars.
What is the best program for you?
Now that we know the specifics of each program, we can conclude that the type of SBA loan you should choose will depend on your goals and needs. If you’re looking to purchase inventory, gain working capital, or pay your employees, then, the best option for you will be a 7(a) SBA loan.
But in the other hand, if you’re looking to expand into a new facility or acquire heavy machinery at a fixed-rate, you will be better off with a 504 SBA loan as it allows the financing of larger projects.
Related article: How Long Does it Take to Get Approved For an SBA Loan?