SBA 7(a) vs. 504 loans

The Small Business Administration (SBA) has a variety of loan programs. These are some of the best business loans available because the SBA guarantees them. This means you may have access to more competitive rates and other benefits than what standard business loans offer.

For many businesses, you will choose between two loan programs, the 7(a) and 504 loans. 7(a) loans are designed for everyday working capital, while 504 loans are meant to finance equipment and commercial real estate.

Because they serve different purposes, you should familiarize yourself with both the SBA 7(a) versus 504 loan options to determine which suits your business best.

What is an SBA 7(a) loan?

SBA 7(a) loans are the most common option for business owners because they provide flexible funding for various business needs. Generally, you can use a 7(a) loan for working capital, equipment or other expenses. The application process is similar to standard bank loans, although it may take longer to process if you don’t apply through the Express program.

Because the SBA guarantees them, 7(a) loans have competitive interest rates — both fixed and variable. However, their low rates mean that you must meet strict eligibility criteria. In many cases, you may also need to provide collateral to secure your loan.

Your business will need to make a down payment of 10 percent to 30 percent of the total loan amount. Depending on the size of your loan, you may pay a guarantee fee or other fees set by your lender.

But despite the fees, down payment and strict requirements, 7(a) loans are one of the most sought-after ways of financing a business.

SBA 7(a) requirements

To qualify for a 7(a) loan, you will need to meet a few basic requirements set by the SBA:

• For-profit business based in the U.S
• Reasonable owner-invested equity
• Exhausted other financing options and personal assets
• Considered a small business based on SBA size standards
• Collateral required for loans above $350,000

Lenders will also set their own requirements. You will likely need good to excellent personal credit — a FICO score of 670+ — and solid annual revenue. Time in business matters as well. While some 7(a) loans are open to startups, most loans go to businesses at least two years old.

Like any loan, you will need to provide documentation. This will include profit and loss statements, business tax returns, personal financial information and a business plan.

How well you meet these requirements will influence your interest rate. The SBA sets its rates to the Prime rate plus 2.25 percent to 4.75 percent. This can be variable or fixed based on your loan amount and lender, but generally, it will be more competitive than the average rates for business loans.

SBA 7(a) loan pros and cons

Because 7(a) loans are designed for working capital, they are best for inventory or other daily expenses. But the SBA 7(a) loan may cost more than a 504 loan.

What is an SBA 504 loan?

SBA 504 loans are designed to cover equipment costs and commercial real estate. Much like 7(a) loans, the application process can take months to complete. There is also a required down payment of 20 percent to 30 percent of the loan amount — but for the 2025 fiscal year, there is no guarantee fee.

The eligibility criteria is also similar between SBA 504 versus 7(a) loans. However, it may be easier to qualify for the 504 loan depending on the size of your business and the type of equipment you are financing. And 504 loans tend to be significantly larger. As of August 2024, the average loan size was over $1.1 million for the SBA 504 loan versus the 7(a) average of $435,057.

504 loans are offered through Certified Development Companies (CDCs). A CDC will partner with the SBA to fund a 504 loan of up to $5.5 million per project and up to $16.5 million spread across three projects.

SBA 504 loan requirements

The 504 program has similar eligibility requirements as the 7(a) program, though your net worth and income also play a role in whether or not your business qualifies.

• For-profit business based in the U.S.
• Net worth less than $15 million
• Two years with an average net income of less than $5 million after federal income taxes
• Reasonable owner-invested equity
• Exhausted other financing options and personal assets
• Considered a small business based on SBA size standards

Your loan will be secured by the equipment or property your business purchases, and the documentation your business needs to provide will be the same as with a 7(a) loan.

The interest rates on a 504 loan are fixed, but the SBA is not explicit about the range. If you are considering a 504 loan, reach out to the CDC you would like to work with for information on potential costs and other fees.

SBA 504 loan pros and cons

504 loans are more difficult to qualify for than a 7(a) loan, but fewer fees are involved — at least for the 2024 and 2025 fiscal years.

SBA 7(a) vs. SBA 504: Which is better?

Whether you choose an SBA 7(a) versus 504 loan depends on how your business will use the loan. 7(a) loans are designed for working capital, while 504 loans are designed for equipment and real estate. While SBA loan rates and the amount you can borrow differ, your business’s needs will determine which program is more appropriate.

When to choose an SBA 7(a) loan

• Your business has gaps in cash flow
• You need to buy inventory to meet customer demands or grow your business
• You need to finance equipment or commercial real estate
• You are able to afford the guarantee fee for larger loan amounts

When to choose an SBA 504 loan

• You are looking to finance or improve a piece of commercial real estate
• You need to finance machinery or other expensive equipment
• You want to work with a CDC and can meet job creation or retention goals
• You prefer a longer loan term of 10 to 25 years

Alternatives to SBA loans

SBA loans can be difficult to qualify for — and you need to explore other financing options before applying. Common alternatives include bank loans and business credit cards, though there are various options to choose from.

• Bank loans. Banks and credit unions offer term loans and lines of credit to established businesses. Many have favorable terms and similar rates to SBA loans.
• Alternative loans. Alternative or online lenders also offer term loans and lines of credit. These may be easier to qualify for if you have a newer business or a lower personal credit score.
• Credit cards. Business credit cards are a flexible way of funding everyday business expenses. While they often have higher rates than lines of credit, you may be able to take advantage of rewards programs similar to personal credit cards.
• Grants. There are business grants available for minority- and woman-owned businesses, as well as grants based on industry. But much like SBA loans, these tend to be competitive.
• Equipment loans. If you are considering a 504 loan, you can explore equipment loans for your business. These are secured loans, which means your business may still qualify for low rates.

The bottom line

The SBA’s loan programs are competitive because they are a solid, comprehensive way to fund your business. Whether you get an SBA 504 loan or a 7(a) loan will depend on your business’s financing needs. Either way, you will need to meet strict eligibility criteria and submit a lengthy application for a chance to qualify for one of these competitive loans.

Frequently asked questions

• What’s the difference between an SBA 7(a) and 504 loan?

  504 loans are meant specifically for equipment financing or commercial real estate. 7(a) can also be used for equipment and real estate but may also be used for any working capital expense.

• How hard is it to get approved for a SBA 7(a) loan?

  It can be difficult to be approved for an SBA 7(a) loan because of the strict eligibility criteria. Very few businesses are able to be approved each year.

• How are SBA 504 rates determined?

  Like 7(a) loans, SBA 504 rates are based on the Prime rate plus a set percentage. The rate typically totals about 3 percent of the debt.