If you’re looking to get into a new business venture, there’s a big chance that you’ll take out a loan. One popular option is the 7A loan program, which can be used to purchase equipment, especially when you’re just starting out. For these types of loans to work out best for you, it’s essential to know the different terms and types available for you.
An SBA 504 and 7A are popular types of business debts that have backing from the Small Business Administration. Most of the factors like the permissible uses, terms, and amounts may vary for each program. Get more information about the two on SBA 504 vs. 7A and see which ones are best for you. If you’re starting, you may likely find the 7A to be helpful as start-up capital, and the 504 is generally used for larger purchases like another commercial lot or another piece of equipment.
What is the SBA 504 Loan?
The amounts may vary from $50,000 to $5 million for specific energy projects and small manufacturers. Permissible uses may include construction of another property, purchasing real estate, equipment finances, and improvements. There’s a maximum repayment term between 10 to 25 years depending on the lender, and the interest rates may vary from 4% to 7%.
Interest rates are generally fixed, and the fees may include the guaranteed costs, bank transactions, etc. The down payment is about 10%, and the collateral is the assets that are being financed. There’s a personal guarantee required, and you need to have a business net worth of $15 million or less. You also need to meet specific criteria like public policy goals or job retention.
What is a 7A Loan?
The loan amounts may vary from $5,000 to $5 million. However, the permissible uses are only as working capital, and it can be utilized to expand one’s company. You may also use it to refinance debt, purchase equipment, or start another business in other locations. See more about 7A on this site here.
Maximum repayment terms can be up to 10 years for the equipment and working capital. If it’s going to be real estate, the terms can be up to 25 years. Interest may vary where the prime rate may be added to 2.25% to 4.75%. It has a variable interest rate and may include various fees upon the transaction’s approval. Down payment is about 10% to 20% of the total amount, and collateral is generally required for amounts that are over $25,000.
You might need to pledge your personal residence and meet the SBA’s definition of a small business. This is for for-profit businesses operating in the US or other US territories. This is where you’re investing your own money in your business, and you can use the money to find additional resources.
Which is Best for You?
When applying to take out a loan, it can be challenging to know which type of loan is best for you. There are two types of loans: 7A Loans and 504 Loans. 7A loans are for small businesses, while 504 loans have low rates with tax deductions available.
The SBA itself is not lending to business owners. Instead, its job is to guarantee the loans whenever an application to a private financial institution or a bank is made. This guarantee will be significantly lower than the lender’s face and incentivizes others to approve applicants that they might reject otherwise.
The 7-A loan is for small businesses who want to purchase construction materials, acquire assets, furniture, and equipment. The eligibility may include various criteria where the personal credit score should be 650+ or more. This will show the financiers that the owners can repay the debt because of their historical cash flow and business revenue.
When you’re financing fixed business assets, you may want to get the CDC loan or SBA 504. It specializes more in equipment, land, and buildings. This is where you can use the funds to purchase a building at least 51% owner-occupied. If you have a 1000 square feet area, your company must at least have 510 sq. ft. occupancy before getting approved. Get more info about SBA 504 by watching this video: https://www.youtube.com/watch?v=dkJa37MzG0A.
Considerations before you apply for either loan type
A 7-A loan is a short-term, variable-rate loan. It is also one of the most affordable loans available. A 504 loan is a long-term, fixed-rate loan with interest rates that are usually lower than mortgage rates. Both loans have pros and cons, so it’s essential to consider which one you need before applying for either type.