When financing commercial real estate through the SBA, you'll encounter two primary options: the 504 loan and the 7(a) loan. Both can finance owner-occupied commercial property, but they have significant differences in structure, rates, and ideal use cases. Understanding these distinctions helps you choose the program that best fits your situation.
Quick Comparison
| Feature | SBA 7(a) | SBA 504 |
|---|---|---|
| Max Loan Amount | $5 million | $5.5 million (CDC portion) |
| Down Payment | 10-20% | 10% |
| Interest Rate | Variable or fixed | Fixed (CDC portion) |
| Term | Up to 25 years | 10, 20, or 25 years |
| Working Capital | Yes | No |
| Structure | Single loan | Two loans (bank + CDC) |
Understanding the SBA 7(a) Loan
The 7(a) program is the SBA's most flexible loan option. A single loan from one lender covers your entire project, including real estate, equipment, inventory, and working capital. This simplicity makes 7(a) popular for borrowers who need comprehensive financing.
7(a) Advantages
- Single loan, single lender, single payment
- Can include working capital and business acquisition
- Faster processing than 504
- More flexible use of funds
- Variable or fixed rate options
7(a) Considerations
- Higher rates than 504's CDC portion
- May require larger down payment (15-20%)
- Variable rate loans carry interest rate risk
Understanding the SBA 504 Loan
The 504 program is specifically designed for major fixed asset purchases, particularly real estate. It uses a unique two-loan structure: a bank provides roughly 50% of the project cost, a Certified Development Company (CDC) provides up to 40%, and you contribute 10% down.
504 Advantages
- Just 10% down payment (lowest available)
- Below-market fixed rates on CDC portion
- Long-term rate lock protects against rising rates
- Higher total project amounts possible
- CDC portion fully amortizes (no balloon)
504 Considerations
- Two loans mean two sets of fees and closings
- Cannot include working capital
- Longer processing time (CDC involvement)
- Job creation/retention requirements
- Occupancy requirements (51% for existing, 60% for new construction)
504 Loan Structure Explained
Understanding the 504 structure helps you see its benefits:
- First mortgage (50%): Conventional bank loan, usually variable rate
- Second mortgage (40%): CDC loan, fixed rate, backed by SBA
- Down payment (10%): Your equity contribution
For a $1,000,000 project: the bank provides $500,000, the CDC provides $400,000 at a fixed rate, and you contribute $100,000. The CDC's below-market fixed rate significantly reduces your overall blended interest rate.
Rate Comparison Example
Consider a $1,000,000 real estate purchase:
7(a) Scenario
- Loan: $900,000 (10% down)
- Rate: Prime + 2.75% (variable)
- Current rate: ~11%
- Monthly payment: ~$8,600
504 Scenario
- Bank loan: $500,000 at Prime + 2% (~10.25%)
- CDC loan: $400,000 at ~6.5% fixed
- Down payment: $100,000
- Blended monthly payment: ~$7,800
The 504 structure saves approximately $800/month in this example, with part of the payment locked at a fixed rate.
Not Sure Which Program Fits Your Needs?
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Check Your EligibilityWhen to Choose 7(a)
- Buying a business with real estate: 7(a) can wrap everything into one loan
- Need working capital: Only 7(a) allows working capital in the same loan
- Smaller projects: Under $500,000, the 504's two-loan structure may not be worth the complexity
- Time-sensitive deals: 7(a) typically closes faster
- Occupancy below 51%: 504 has stricter occupancy requirements
When to Choose 504
- Large real estate purchases: Maximize leverage with just 10% down
- New construction: 504 excels for ground-up projects
- Long-term hold: Fixed rates provide payment certainty
- Rising rate environment: Lock in rates on 40% of your debt
- Cash preservation: Lower down payment preserves working capital
Can You Use Both Programs?
Yes, in some cases. Borrowers with multiple projects or complex financing needs sometimes use both programs strategically. For example, you might use a 504 loan for real estate and a separate 7(a) loan for equipment or working capital. Discuss this option with lenders experienced in SBA financing.
Making Your Decision
The right choice depends on your specific situation. Consider your down payment capacity, rate risk tolerance, project complexity, and long-term plans. Many borrowers benefit from discussing both options with experienced SBA lenders who can model different scenarios and recommend the optimal structure for your needs.