SBA 7(a) vs SBA 504 in Commercial Real Estate

What is the Difference Between SBA 7a and SBA 504 in Commercial Real Estate?

The SBA 7(a) Loan and SBA 504 Loan are two of the most common Small Business Administration (SBA) loan programs used for commercial real estate, but they serve different purposes and have distinct structures.

1. SBA 7(a) Loan

• Purpose: Flexible financing for various business needs, including purchasing, refinancing, or improving commercial real estate, working capital, equipment, and even business acquisitions.
• Loan Size: Up to $5 million.
• Loan Structure: A single loan from an SBA-approved lender (banks, credit unions, or non-bank lenders).
• Down Payment: Typically 10%–20% from the borrower.
• Interest Rates: Variable or fixed, typically tied to the Prime Rate (e.g., Prime + 2.75%).
• Term Length: Up to 25 years for real estate; 10 years for working capital and equipment.
• Use Case: Ideal for businesses looking for flexibility, lower down payments, and the ability to finance multiple business expenses in addition to real estate.

2. SBA 504 Loan

• Purpose: Specifically designed for the purchase, improvement, or construction of owner-occupied commercial real estate and long-term fixed assets (e.g., large equipment).
• Loan Size: Up to $5.5 million per project (total financing may exceed this limit).
• Loan Structure:
  • 50% from a private lender (bank or credit union).
  • 40% from a Certified Development Company (CDC) backed by the SBA.
  • 10% from the borrower (or 15%–20% for special-use properties like hotels).
• Interest Rates: The bank portion has a market-based rate, while the CDC portion has a fixed rate (typically lower).
• Term Length: 10, 20, or 25 years.
• Use Case: Best for businesses that want lower down payments, long-term fixed rates, and are primarily focused on real estate purchases.

Comparison: SBA 7(a) vs SBA 504

Which One Should You Choose?

• Choose SBA 7(a) if you need flexibility (e.g., working capital + real estate + equipment in one loan).
• Choose SBA 504 if you’re focused on commercial real estate with long-term stability and want a lower down payment with a fixed rate.