If you run a business and you're tired of paying down your landlord's loan every month, the SBA has two programs built for you. They both get you in with a small down payment and long terms. They're built very differently, though, and picking the wrong one can cost you real money over 25 years.
Here's how I explain it to business owners sitting across my desk.
How the 504 works
A 504 splits the project into three pieces. A bank or credit union makes a first loan for about 50% of the cost. A Certified Development Company, backed by the SBA, makes a second loan for up to about 40%. You put in about 10%.
The SBA piece carries a fixed rate for the full term, available at 10, 20 or 25 years. That's the big draw. You lock a large share of your building's financing at a fixed payment for decades, and your monthly cost becomes very predictable.
The SBA portion is generally capped at $5 million, or $5.5 million for manufacturers and certain energy projects. Because the bank's piece has no SBA cap, total projects can run well past that.
How the 7(a) works
A 7(a) is a single loan from one SBA lender, generally up to $5 million. Real estate can be amortized over as long as 25 years.
Where the 7(a) shines is flexibility. One loan can buy the building, buy the business inside it, fund equipment, cover working capital and pay off a partner. A 504 can't touch working capital or a business acquisition.
Most 7(a) loans are variable, tied to prime, with SBA caps on how far above prime a lender can price. Some lenders offer fixed options, so it's worth asking.
Who should lean 504
You're buying or building real estate, and maybe heavy equipment, and that's the whole deal. You plan to own the building a long time. You want to know your payment in year 15.
The 504 also tends to work well on larger projects, since the bank's share isn't capped by the SBA.
One thing to know going in. The SBA portion of a 504 carries a prepayment penalty that steps down over the first half of the term. If there's a real chance you'll sell or refinance in a few years, factor that in.
Who should lean 7(a)
You're buying an existing business along with its building. You need working capital to grow into the space. You're buying out a partner. Or the deal is smaller and you'd rather deal with one lender and one set of documents.
Under the SBA's current rules, a startup or a full change of ownership needs at least 10% equity injection on a 7(a). Part of that can sometimes come from a seller note, but only if it sits on full standby.
The rules both programs share
Your business has to occupy at least 51% of an existing building, or at least 60% of new construction. You can lease out the rest, which helps.
The lender will look hard at your business cash flow, not just the property. They'll want two to three years of business and personal tax returns, a year-to-date profit and loss statement and a personal financial statement. Anyone owning 20% or more will personally guarantee the loan. If your books are messy, fix that before you apply. It's the most common reason I see SBA deals drag.
What most owners get wrong
They pick the program before they look at the deal. I'd rather start with what you're buying, how long you'll hold it and what else you need the money for. The right program usually becomes obvious from there.
Sometimes the answer is neither. A conventional loan on an owner-occupied building can beat both SBA options when you have more cash to put down and strong financials. Run the numbers in our calculator or look at our SBA program details.
If you're thinking about buying your building, schedule a free consultation. I'll lay the 7(a), the 504 and a conventional option side by side so you can see which one actually does more for you.