The United States Small Business Administration (SBA) provides government-backed loans that assist small and medium-sized businesses to obtain the necessary funding for various objectives including inventory investment, equipment or supplies purchase, or new worker hire. 504 loans and 7(a) loans are two common types of SBA loans. Notably, though SBA loans have higher maximum loan amounts, 7(a) loans display a broader range of potential applications.
Small businesses seeking long-term financing of up to $5 million can opt for SBA 504 loans. For select energy projects or small manufacturers, the loan cap may extend to $5.5 million. These loans offer fixed interest rates and repayments terms that may extend to 10, 20, or 25 years. However, the catch lies in the fact that these funds can't be used as working capital, and is primarily dedicated to fostering business or job growth.
On the other hand, SBA 7(a) loans predominantly cater to small companies desiring growth financing, be it for purchasing machinery and equipment, improving real estate or buildings, or as a working capital. Like 504 loans, these loans also have a cap limit of $5 million but under SBA Express and Export Express delivery methods, loans are capped at $500,000. These loans, with repayment terms extending up to 25 years, provide a more extensive array of potential uses, including refinancing debt and changing company ownership.
The interest rates for both SBA 504 and 7(a) loans differ. While 504 loans' rates are linked to an increment above the current market rate for 10-year U.S. Treasury issues, with a prospective annual service fee of 0.331% in fiscal year 2025, the interest rates for 7(a) loans vary based on the borrower and the lender. Moreover, 7(a) loans demand an upfront SBA Guaranty Fee and annual service fees, generally paid by the lender.
SBA 504 loans require the financed assets such as real estate, equipment, etc., to serve as loan collateral. In contrast, the requirement of collateral for 7(a) loans is conditional on the loan amount and delivery method. Another significant distinction is that 7(a) loans, unlike 504 loans, can be used to refinance existing business debt.
Prepayment penalties apply to both 7(a) loans and SBA 504 loans, contingent upon certain loan amounts and durations. The SBA doesn't disclose funding timelines for 504 loans whereas for 7(a) loans, the turnaround time may range between five and ten days for certain loan types.
Given the diverse funding options provided by the SBA, businesses should prudently compare borrowing options before proceeding. Factors to consider include the amount of funding needed, its application, and the repayment period. Such considerations will facilitate the selection of the ideal small business loan to suit their respective goals.