SBA Loans For Real Estate: SBA 504 VS 7(a) Loans Comparison

The SBA has several options for small business owners in need of a business loan for real estate. Of the different types of SBA loans, 7(a) loans and 504 loans are the two most viable options for real estate purchases.

In this post, we’ll explore the differences between the two types of loans to help you determine which is best for funding your real estate purchase.

Types Of SBA Real Estate Loans: 504 Loans VS 7(a) Loans

If you’re looking to finance commercial real estate through the SBA, the 504 and 7(a) loan programs are the primary options. While both can be used for real estate, they have some differences that can make one better for small business owners than the other.

The main differences are in where the funding originates, the loan structure, and the SBA loan down payment. SBA 504 loans are supported by both the SBA and CDCs (Certified Development Companies) and have strict loan structures in which the borrower is only required to make a down payment of 10%.

A 7(a) loan is partially guaranteed by the SBA. The loan structure can vary dramatically, depending on the risk involved with financing — 10% is the minimum down payment required.

SBA 504 loans offer fixed-rate financing, while 7(a) loans typically have variable interest rates tied to the prime rate.

SBA 504 Loans For Real Estate

The SBA 504 loan is a program backed by the SBA and Certified Development Companies. These selective loans are open to for-profit small businesses operated by United States citizens and resident aliens. They offer fixed interest rates, long-term financing, and smaller down payments.

The purpose of 504 loans is to promote job creation by supporting small businesses. Recipients are connected with a CDC, a nonprofit organization that is certified and regulated by the SBA. The CDC will then provide financing in partnership with the SBA.

Loan Usage

These loans can be used for fixed assets (such as real estate) and a few soft costs. There are strict policies on how the funds may be used — borrowers cannot use financing for working capital, inventory, or consolidation and/or repayment of debt.

The 504 program also includes a standalone debt refinancing option that allows qualifying businesses to refinance existing debt not connected to a new expansion project — ask your CDC for details.

Because of the focus on fixed assets, 504 loans are often referred to as SBA Real Estate Loans or SBA Commercial Real Estate Loans. A 504 loan can be used to purchase an existing building, land, land improvements, construct or renovate facilities, purchase equipment for long-term use, or refinancing debt connected to renovation or equipment. This makes 504 loans a strong option for real estate financing.

Additionally, pursuant to the program’s goal of promoting job creation, a business must generally create or retain one job for every $65,000 borrowed. If not, your project must meet a public policy goal as defined by the SBA. For small manufacturers, this threshold is one job per $100,000 borrowed.

Rates & Terms

SBA real estate loan rates do vary depending on loan and lender. SBA 504 loans are known for long-term fixed rates and fees, set by the current market rate for 5- or 10-year Treasury issues. Fees may include:

• Interest rates
• CDC servicing fees
• Central servicing agent fees
• SBA guarantee fees
• Bank fees
• Third-party fees
• Prepayment fees

While no limit exists on project size for 504 loans, there is a maximum SBA loan amount of $5 million. This number may rise to $5.5 million for certain small manufacturers or if the recipient intends to use the money to finance an energy-related project.

How To Apply

To apply for an SBA 504 loan, you’ll work with a Certified Development Company (CDC) and a lending partner, such as a bank or credit union.

You’ll need to provide financial documentation, including tax returns, financial statements, and details about your project and projected costs. The lender and CDC will review your application, assess eligibility, and guide you through the approval process.

Because of the multi-step structure, approval and funding can take several weeks or longer.

Eligibility

You must meet the following eligibility requirements to qualify for a 504 loan:

• You must have a US-based for-profit company
• Your credit score must be at least 680
• Your business must occupy 51% of your building
• Your business’s net worth must be less than $20 million
• You must be able to pay 10% or more of the project costs for the down payment
• You must be able to show your ability to repay the loan on time from your operating cash flow

Read our guide to SBA 504 loans to learn more.

SBA 7(a) Loans For Real Estate

7(a) loans are the most popular financing option for small business owners. They are backed by the SBA up to 85% for loans of $150,000 or less, and up to 75% for loans above $150,000. There are several types of 7(a) loans that provide versatility, long terms, favorable rates, and flexibility for small businesses.

Loan Usage

SBA 7(a) loans can be used for a wide variety of needs: working capital, building, renovating, business startups, construction, real estate, equipment, and more, depending on your lender and loan agreement. This versatility, of course, also includes fixed assets (such as real estate purchases). SBA 7(a) loans are flexible and can be negotiated depending on a particular business’s needs, making them a strong option for many small businesses purchasing real estate.

Rates & Terms

Rates and terms for 7(a) loans can vary depending on the specific loan agreement, lender, borrower, etc. The SBA Loan Calculator is a great way to understand your loan’s rates and fees better. We track the current SBA loan rates at merchant Maverick.

While your rates and terms will vary depending on the type of SBA 7(a) loan, the maximum borrowing amount for a 7(a) loan is $5 million. Furthermore, a minimum down payment of 10% is typically required.

How To Apply

To apply for an SBA 7(a) loan, you’ll submit an application through an SBA-approved lender or use the SBA’s Lender Match tool to connect with potential lenders.

Most lenders will require financial documents such as tax returns, financial statements, and details about your business and how the loan will be used.

The lender will evaluate your credit, cash flow, and overall financial profile before issuing approval and final loan terms.

Eligibility

According to the SBA, to be eligible for a 7(a) loan, your business must:

• Operate for profit
• Be considered a small business, as defined by the SBA
• Be engaged in, or propose to do business in, the United States or its possessions
• Have reasonable invested equity
• Use alternative financial resources, including personal assets, before seeking financial assistance
• Be able to demonstrate a need for a loan
• Use the funds for a sound business purpose
• Not be delinquent on any existing debt obligations to the US government

Additionally, a credit score of at least 640 is generally required. See our guide to SBA 7(a) loans for more information.

SBA 504 VS 7(a) Loans For Real Estate: Which Is Best For Your Business?

Not sure which SBA real estate loan type to pursue? Here are some general tips.

Choose A 504 Loan To …

• Finance a real estate purchase
• Finance the improvement of existing real estate
• Purchase equipment
• Refinancing debt connected to renovation or equipment

Choose A 7(A) Loan If You Want …

• Working capital
• Startup funding
• Financing for fixture/furniture purchases
• Financing for leasehold improvements
• Financing for acquiring an existing real estate business

Choose Another Option If …

• Your business is ineligible to receive an SBA loan (real estate investment firms are among the business types ineligible for SBA loans)
• You run a nonprofit business
• Your business does not operate in the US
• You don’t have the ability to pay a 10% down payment on what you seek to borrow
• You can’t provide a business plan that details how you will use the loan proceeds and repay the loan

If you decide that an SBA loan isn’t right for you or you need funding for another purpose, make sure to check out the best loans for small business to find a funding source that works for your business.