Small businesses sometimes need a little financial help. Whether you are looking to help with your day-to-day expenses or you are looking to invest in growing your business, an SBA business loan might be a good option. The SBA 504 and the SBA 7a are small business loans that might help your financial portfolio.
What Are SBA 504 vs. 7A Loans?
Let’s compare the differences and similarities between an SBA 504 vs. 7A loan below.
SBA 504 Loans
An SBA 504 loan is given to business owners seeking to purchase or improve their existing assets. These assets can include land, buildings, or company equipment.
The business owner’s motivation is taken into account when being considered for this loan. Approval will go to those who have promising projects for economic development or show that they are supporting public policy goals.
The SBA 504 has a three-part loan structure. A bank or other lender will lend 50% of the loan amount. An SBA-approved Certified Development Company (CDC) covers 40% of the loan amount. CDCs are local nonprofit lenders interested in improving economic development in their communities.
The borrower is responsible for 10% of the loan amount as a down payment. New entrepreneurs and owners of specific use properties will have to provide higher down payments.
Money from an SBA 504 loan can be used for properties if the owner occupies at least 51% of existing properties. Newly constructed properties require that the owner occupies 60% of the property.
SBA 7a Loan
The SBA 7a loan is a general business loan designed for small business owners. This loan is more flexible than the SBA 504, and funds can be used for various business needs.
Banks and other SBA lenders give these loans, but the SBA partially guarantees them. This partial guarantee motivates lenders to approve loans they might have otherwise denied.
Money borrowed with an SBA 7a loan can be used to buy, renovate, or construct a commercial property. Business owners can purchase equipment, fixtures, or furniture. Borrowers can use the funds to buy land for their business or use it for working capital.
SBA 504 Loan Rates
SBA 504 loan rates are some of the lowest for a small business loan. Borrowers will also benefit because the SBA loan has fixed-rate interest meaning the interest rate will not change throughout the loan.
Four other fees come with an SBA loan. The SBA charges the borrower a 0.5% upfront fee, and the SBA also charges a 0.368% annual service fee applied to the loan’s principal balance. The CDC charges the borrower a 1.5% upfront processing fee. The CDC will also charge a yearly servicing fee between 0.625% and 2% of the outstanding principal balance.
If you are looking to compare, SBA 7a loan rates are variable and are calculated with the Prime Rate, which is based on how the market is doing. These rates will be comparable to other conventional bank loans. It would be best to keep in mind that the variable interest can cause fluctuations in the interest rate.
There are some additional fees associated with the SBA 7a loan. The SBA will charge a guarantee fee, and banks typically charge packaging and closing fees.
SBA 7a Loan Requirements
SBA 7a loan requirements ask the borrower to provide collateral for the loan. To secure larger loans, the SBA will ask the lender to put a lien against the assets financed with the loan. If the loan is not entirely secured, they may put a lien on the borrower’s residence.
Business partners who own 20% or more of the business will be required to sign a personal guarantee.
In contrast, SBA 504 loans are self-secured, so there is no need for collateral. However, partners owning 20% or more of the business will be required to sign a personal guarantee on the CDC and bank portion of the loan.
Main Differences Between SBA 504 vs. 7a Loans
There are several differences between SBA 504 vs. 7a loans. One of the most significant differences is how the loan money can be spent, and each loan has specific requirements as to how the funds can be used.
Another noticeable difference is related to the interest rate. The SBA 504 loan has a fixed rate, while the SBA 7a loan has a variable interest rate.
There is a difference between the SBA 504 vs. 7a maximum repayment term for the loan. Borrowers can repay the SBA 504 loan in 10, 20, or 25-year terms, while the 7a has a maximum repayment term of ten years.
Collateral is needed for the SBA 7a loan but not for the SBA 504. There is no difference between the SBA 7a vs. 504 guarantees; a partner owning 20% or more of the company is required to sign a guarantee.
The SBA 7a eligibility terms for a loan require a business owner to have invested their own money in the business and to show they have tried to use other financial resources. The 504 loan requires a 10% down payment from the borrower, and they must show they are creating jobs or supporting public policy goals.
The application process for the 7a is much quicker than the SBA 504.
SBA 504 vs. 7a: Which is The Best Loan for My Gym Business?
The SBA 504 and the SBA 7a are good options for a small business loan. The SBA 7a is a good choice for business owners looking for a smaller loan to help cover their working capital. This loan offers more flexibility.
The SBA 504 is an excellent option for a business owner looking to make a more considerable investment in their business. This loan is ideal for those considering the purchase of a commercial property.
Whatever your financial needs, the SBA 504 and 7a loans are affordable. These loans can provide you with the financial security your business needs while it continues to grow, and they can also give you peace of mind while you continue to shape your financial future.
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An Outsourced CEO and expert witness, Jim Thomas is the founder and president of Fitness Management USA Inc., a management consulting, turnaround and brokerage firm specializing in the gym and sports industry. With more than 25 years of experience owning, operating and managing clubs of all sizes, Thomas lectures and delivers seminars, webinars and workshops across the globe on the practical skills required to successfully overcome obscurity, improve sales, build teamwork and market fitness programs and products. Visit his Web site at: www.fmconsulting.net or www.youtube.com/gymconsultant.