Today's blog post is about differences in SBA loan programs for real estate financing. National Commercial Property Loans has been doing commercial real estate financing since 2006 and we always run into a lot of questions that borrowers have about what would be the best program for me? So it was about time we created a blog post about this great question.
So should I go for the SBA 504 program or the SBA 7(a) program? When it comes to financing real estate the answer almost always is going to be the 504 program is the best option for your business. Why is that? The 504 program offers many advantages that the 7(a) loan doesn't. The 504 program offers fixed rates for twenty years. Most 7(a) loans that you would get through a bank are variable rate loans. The 504 and the 7(a) programs are both great programs, but they focus on different purposes. The 504 program is specifically for real estate and equipment financing.
With the 504 there’s a big advantage to you as a business owner so if you're doing a new project or you're growing into a new facility a fixed-rate would be a good fit for you. Especially in an interest rate environment like we're in right now where, yes interest rates are low and have been for a while, but they're going to be rising over time. The 7(a) program typically does not offer a fixed-rate option. Most lenders would give you a variable rate which might be a good payment now, but as time goes on a as interest rates rise, so does your loan payment. So here’s an important difference to know that the 504 program allows you to fix a rate and the 7(a) program doesn’t. The SBA 7(a) product is typically well suited to projects that have inventory needs and working capital needs. There are times where it is a good product for real estate but in the situation where you're going to be holding your real estate for the long-term then the 504 would be a better option as it gives you a fixed rate.
Quick Comparison
SBA 504 LOAN (Commercial Real Estate & Equipment) 90% Fixed-Rate | SBA 7(a) LOAN (General Purpose) | |
LOAN SIZE | Estimated Minimum – + $350,000 Estimated Maximum – $5 million + | Estimated Minimum – + $350,000 Estimated Maximum – $5 million + |
INTEREST RATE | • Fixed | • Predominantly variable; some fixed-rate options |
TERMS | • 20 years – real estate • 10 years – equipment | • Up to 25 years – real estate • Up to 10 years – business acquisition, equipment • 5 to 7 years – working capital • Weighted average for mixed-use requests |
DOWN PAYMENT | • 10% borrower | • Minimum 10% borrower (often more) |
Keep in mind that a lot of banks don't necessarily have an expertise in SBA lending or they may have an expertise in the SBA 7(a) program but not in the 504 program. Also there are some lenders who favor the 7(a) program for real estate projects, even though it may not be in your best interest because they see it as a more lucrative product for their institution, this is just something to be aware of. Should you have any more questions, please do not hesitate and give us a call at 888-640-3444 or you can fill our online form. At National Commercial Property Loans,our goal is to help grow your business. Our experienced loan managers will work closely with you to help pinpoint the best loan option for your business.
