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SBA 7a vs Fixed 504 Loan: Which is Right For You?


Both the SBA 7a and 504 loans are federally backed loans that can be used to help small businesses reach specific goals. While they share certain characteristics, the 7a and 504 have key differences that will help you decide which one is a better option for you. Depending on your current business needs and eligibility, you may also wish to change from a 7a loan to a fixed rate 504 loan. Let’s take a closer look at these two types of loans to determine the best fit for your small business. 

What is the SBA 7a Loan?

The SBA 7a loan is a federally backed loan that can be used for a variety of applications. There is no minimum, but it does max out at 5 million dollars. The interest rate varies depending on the amount loaned and how mature the loan is:

Original Loan AmountMaturation < 7 yearsMaturation > 7 years
$25,000 or lessBase rate + 4.25%Base rate + 4.75%
$25,001 to $50,000Bae rate + 3.25%Base rate + 3.75%
$50,001 and aboveBase rate + 2.25%Base rate + 2.7%

As you can see, the interest rate on a SBA 7a loan goes down the higher the amount loaned, and that initial rate increases past seven years maturation. 

Again, the 7a loan can be used for a variety of business expenses, including fixed assets (real estate, equipment, furniture, etc.) and current assets, like working capital or inventory. The loan terms will vary according to the specific application:

  • Inventory/Capital = 10 years
  • Real Estate = 25 years
  • Equipment = 10 years
  • Other = 25 years*

*Specific loan terms for projects not listed will be determined by the lender during the application process. 

SBA 7a Loan vs Fixed 504 Loan

As the name suggests, one of the biggest differences between the SBA fixed 504 loan and the 7a is that the 504 has a fixed interest rate. The 504 loan is also typically for a larger amount, with a current minimum set at $125,000 (although the max is still around 5 million). 

Another key difference between the SBA 7a and fixed 504 loans is what each can be used for. While 7a loans can include current assets, fixed 504s may only be used for fixed assets. These are long-term assets needed to sustain the business, such as buildings, equipment, software, and furniture. In the case of a 504 loan, the assets for which you are securing funding act as collateral. In a 7a loan, you may need to offer another form of collateral, such as a residence or other property. 

Finally, SBA fixed 504 loans are issued through Certified Development Companies (CDCs). These are non-profit companies that meet a stringent set of criteria and work with banks and other lending institutions to facilitate the 504 loans for small businesses. Currently, there are only around 260 of these companies across the US, each operating in a district set and overseen by the SBA. 

A CDC will typically help a potential borrower secure up to 40% of a loan through the 504 program (with 10% down payment), and a bank or other traditional lender will cover the remaining 50%. This allows a substantial portion of a loan to be subject to the much lower interest rates and fees associated with the 504 loan versus those accrued when borrowing the entire amount through a bank. 

Requirements for SBA 7a vs Fixed 504

The eligibility requirements also vary for the SBA 7a and the Fixed 504. In order to qualify for the 7a loan you must:

  • Meet the SBA’s definition of “small” business
  • You must have tried other financial sources first (including personal investments)
  • You must be a for-profit business within the US

504 applicants must, likewise, be for-profit businesses operating within the United States. They must also:

  • Have an average net worth of less than 15 million and an average net income of no more than 5 million for the past two years
  • Meet job-creation criteria and other public policy goals set forth by the SBA

These specific criteria are in addition to standard requirements, such as good credit, proof of income, and a down payment of 10-15 percent. 

So, Which SBA Loan is Right For You?

We have mapped out some key differences between the SBA 7a loan and the 504 fixed loan. While you will want to speak with an experienced lender to ultimately decide which is right for you, the following can be helpful in choosing.

You may wish to opt for the 7a loan if:

  • You need capital to fill cash flow gaps or for current assets, such as inventory
  • You need financing for fixed assets but do not meet job creation or other public policy criteria needed for a fixed 504 loan
  • You have collateral to back the loan
  • You don’t mind a variable interest rate

On the other hand, you might choose the fixed 504 loan program if:

  • You prefer a fixed interest rate
  • You are financing fixed assets only, such as real estate or office equipment
  • You can meet the SBA public policy and job creation requirements
  • You are aware that the assets you are financing via the 504 will be used as collateral for the loan

Can I Refinance My SBA 7a Loan to a Fixed 504?

Yes, under certain circumstances, the SBA allows business owners to refinance their 7a loans with a 504 loan at up to 85 percent of the loan value. This can be a great option for businesses that now meet the requirements for the fixed rate terms of the 504. 

If you need assistance applying for a first time SBA 504 loan in Colorado, or if you would like to see if you qualify for a refinance, contact the lending professionals at Cedco. As a small, woman-owned business, we are passionate about making financing accessible and as transparent as possible for our fellow Colorado businesses. Call or go online today to get started. 

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