Comparisons
SBA 7(a) versus SBA 504
On a $1,250,000 building the 504 payment runs about $2,426 a month below a 7(a). But 504 money cannot touch working capital. Here is where the line falls.
The short version. If you are buying or building owner occupied real estate or heavy machinery and nothing else, the 504 is cheaper and it is not close. If the deal includes working capital, inventory, goodwill on a business purchase, or a debt refinance, the 7(a) is the one that can actually cover it. The choice is decided by your use of funds, not by your rate.
These are the two main SBA programs and they are not interchangeable. The 7(a) is a general purpose guaranteed loan that can fund almost any legitimate business need. The 504 is a fixed asset program delivered through a Certified Development Company, and its proceeds are restricted to long lived assets. Most owners meet the 504 and immediately want to use part of it for operations. You cannot.
The same $1,250,000 project, priced both ways
Assume an owner occupied building at $1,250,000, a profitable operating business, and a borrower who can inject 10 percent. Under 504 the deal splits into a bank first mortgage at 50 percent, a CDC and SBA debenture at 40 percent, and your 10 percent down. Under 7(a) it is one loan at $1,125,000 with the same 10 percent down.
| SBA 7(a) | SBA 504 | |
|---|---|---|
| Structure | One loan, $1,125,000 | $625,000 bank plus $500,000 debenture |
| Rate | About 10.25 percent, usually variable off Prime | Bank around 7.5 percent, debenture fixed around 6.5 percent |
| Term | Up to 25 years on real estate | Up to 25 years on both pieces |
| Monthly payment | $10,421 | $7,995 combined |
| Total paid over 25 years | About $3,126,300 | About $2,398,500 |
| Up front fee | Guaranty fee, typically about 3.5 percent of the guaranteed portion | Debenture fees around 2.5 to 3 percent, usually financed |
| Down payment | 10 percent, sometimes 15 percent | 10 percent, 15 to 20 percent for special use or startup |
| Working capital allowed | Yes | No |
| Goodwill on an acquisition | Yes, with limits | No |
| Time to close | 45 to 60 days | 60 to 90 days |
| Prepayment penalty | 5, 3 and 1 percent on terms of 15 years or more | Declining on the debenture through year 10 |
The 504 payment is about $2,426 a month lower, which is $29,100 a year and roughly $727,800 over 25 years on the identical building. That gap comes from two places: the debenture rate is fixed and below market, and only half the deal sits at conventional bank pricing. On any deal the 504 can legally fund, that is very hard to beat.
The break even, stated plainly
Since the 504 wins on price whenever it is available, the real break even is about eligibility, not arithmetic. The 504's fixed second is worth roughly 300 basis points against a variable 7(a), which on a $500,000 debenture is about $15,000 a year. If your soft costs, meaning working capital, inventory, goodwill, and anything else the 504 cannot touch, come to less than about 15 percent of the project, take the 504 and fund the soft costs somewhere else. Above that, the 7(a) is simpler and often cheaper once you count the second facility.
The second break even is the clock. A 504 runs 60 to 90 days and requires two closings, two sets of documents, and a CDC in the middle. A 7(a) runs 45 to 60. If your seller will not extend, the 7(a) is the only real option regardless of what the payment comparison says. A cheaper loan you do not close is worth nothing.
Who each one is actually for
- The 504 is for you if the money is buying owner occupied commercial real estate, constructing a building, or purchasing heavy machinery with a long useful life, and you want a fixed rate on the largest piece of it. It is the best priced real estate money a small business can get in this country.
- The 7(a) is for you if the project mixes fixed assets with anything else: a business acquisition with goodwill, a building purchase plus $200,000 of working capital, a refinance of existing debt, or a leasehold improvement package on space you do not own.
- Use both on one project when it fits. A 504 for the building and a separate 7(a) for the operating capital is a common and perfectly acceptable structure. Two files, two closings, one closing table if the lender is organized.
- Neither if you plan to occupy less than 51 percent of an existing building or 60 percent of new construction. SBA real estate programs require owner occupancy. An investment property is a conventional commercial mortgage question, not an SBA one.
One structural point that is easy to miss. Under 504, the bank's 50 percent piece is a conventional loan on conventional terms, so it can be fixed or variable, and its rate is negotiable in a way the debenture never is. The debenture rate is set when the bond sells into the market, which usually happens a month or two after you close. Most banks bridge that gap. Ask exactly how the bridge is priced and what happens if the debenture rate moves between your approval and the sale.
The fee and prepayment differences that catch people
On a 7(a) of this size, the guaranty fee typically runs around 3.5 percent of the guaranteed portion, roughly $29,500 on this deal, and it is normally financed into the loan. A 504 carries CDC processing, funding, and servicing fees that generally total about 2.5 to 3 percent of the debenture, also financed. Neither program is fee free, and both fee structures change with SBA policy, so ask your lender for the current schedule in writing rather than trusting an article.
Prepayment is the one people find out about late. A 7(a) with a term of 15 years or more carries a declining penalty of 5, 3 and 1 percent in the first three years. The 504 debenture carries a prepayment penalty that declines across the first ten years. If there is any chance you sell the building or refinance inside a decade, model that cost before you sign. Read how prepayment terms actually work and get the schedule attached to your commitment letter.
What we do with this
Exp Capital Solutions is a broker, not a lender and not a CDC. We do not originate SBA loans and we do not set the debenture rate. What we do is take your use of funds apart line by line before anyone submits anything, because that breakdown is what decides this question and getting it wrong costs a month. If more than a small slice of the project is working capital or goodwill, we will tell you the 504 cannot cover it, even when a 504 would have looked better on our end. Then we lay out the options side by side with payment, total cost, timeline, and prepayment terms in the same units.