SBA 504 or 7(a) Loans: Which is Best For Your Business?

You’ve got a winning business idea. Now comes a challenge: determining what funding will get your business off the ground or to the next level.

Whether a serial entrepreneur or a first-time owner, businesses require capital to succeed. Your financial needs and business model are the strongest indicators for finding the right lending solution. While there are many options for funding, small business owners often utilize loans backed by the U.S. Small Business Administration (SBA) for spending flexibility and to help with operating expenses.

Throughout his career, Jeff Hansel has helped small businesses grow by accessing resources and capital through SBA lending. As one of Rockland’s SBA experts, he walks through what business owners should know about the two common lending programs –  the 504 and 7(a) loans – and the benefits of working with a community bank.

As the most popular SBA lending option, think of the 7(a) as a general-use loan. Jeff notes these term loans can typically be applied to a wide range of purposes, including working capital, asset acquisition, refinancing, and business purchases.

“We receive a lot of loan applications where business owners are looking for leasehold improvements like shelving the HVAC or plumbing, buying a car or another piece of equipment, and looking for permanent working capital,” Jeff said.

At a high level, an SBA 7(a) loan:

A 7(a) loan can also be used for owner-occupied commercial real estate purchases, however, if considering purchasing another property or commercial real estate, a 504 likely makes more sense for your situation.

The 504 is a fixed-rate long-term loan that can finance assets crucial to business expansion, primarily the purchase or construction of commercial real estate. Fixed assets like heavy machinery also fall under this category of SBA loan.

Unlike other SBA loans, the capital for the 504 comes from three sources. Typically a third-party lender, like a bank, covers approximately half of the loan, a borrower injects 10%, and a Certified Development Company (CDC) covers the rest. A dedicated banking partner like Rockland Trust will walk you through this process.

At a high level, an SBA 504 loan:

Pro tip: An SBA 504 loan isn’t the only way to secure new machinery for your business. Depending on your unique situation, consider available leasing options.

As the owner of a small business, you have enough on your plate! The Rockland Trust SBA lending team is here to help you determine the best loan for your business and set you up for future success.