If you’re looking for a small business loan to purchase commercial real estate or heavy machinery/equipment, the SBA 504 loan is the best choice.  If purchasing a business or getting working capital is the goal, the SBA 7A loan is likely the better tool.

More explicitly, with a SBA 504 loan, proceeds can be used to buy a building, finance ground-up construction or building improvements, or purchase heavy machinery and equipment.  7a loan proceeds can be used for short-term or long-term working capital and to purchase an existing business, refinance existing business debt, or purchase furniture, fixtures and supplies.

504 v. 7A

  • 504 does not require additional outside of project collateral. The 7A requires that the bank take collateral so that the loan is fully secured.
  • 504 offers below market rates.
  • 504 fees are lower than 7A fees in most instances.
  • 504 accommodate larger projects. 7A projects cannot go much further north of $5MM. 504 can accommodate projects up to the $13MM range.
  • 504 allows borrower to use funds from a home equity line of credit (HELOC) or seller carry note towards their down payment. 7A will only permit a HELOC to be used as down payment if there is some source of outside repayment available.
  • 7A has a very short prepayment penalty (3 years 5%, 3%, 1%). The 504 prepayment penalty is over 10 years but is very low (based off of the debenture rate not effective rate
  • 7A allows for the financing of working capital, inventory etc. The 504 is real estate and equipment only (includes construction).

Click below for a 504 – 7A – Conventional loan comparison