SBA 7(a) vs. 504: Choosing the Right SBA Program

Both 7(a) and 504 are SBA loan programs, but they serve different purposes and work through different structures. Choosing the wrong program does not just mean suboptimal terms — it could mean a rejected application because your use case does not fit.

Here is how to pick the right SBA program for your situation.

Fundamental Differences

7(a) is the SBA's general-purpose program. It funds almost anything business-related through a single lender (bank, credit union, or online lender).

504 is specifically for major fixed assets — real estate and heavy equipment. It uses a unique two-lender structure: a bank plus a Certified Development Company (CDC).

The 504 Structure Explained

The 504 program has a unique three-party funding structure:

• 50% — Conventional bank loan (first lien position, market rates)
• 40% — CDC loan (second lien, SBA-backed, fixed rate)
• 10% — Your equity injection (down payment)

Rate Comparison

Current approximate rates (rates change monthly — verify with lenders):

When to Choose 7(a)

The 7(a) program is typically your best choice when:

• You need working capital — 504 cannot fund working capital
• You are buying a business — Acquisitions including goodwill need 7(a)
• You are refinancing existing debt — 504 cannot refinance unrelated debt
• The project is under $500,000 — 504 complexity may not be worth it
• You need faster closing — 7(a) typically closes 2-4 weeks sooner
• You may prepay early — 7(a) variable loans have no prepayment penalty
• You want one lender relationship — 504 involves two lenders
• You are buying equipment you may upgrade — 504 requires 10+ year useful life

When to Choose 504

The 504 program is typically your best choice when:

• You are buying commercial real estate you will occupy 51%+
• You want fixed-rate financing locked for the full term
• You want the lowest down payment — 10% is standard
• The project is $500,000+ — where 504 benefits are most significant
• You are buying heavy equipment with 10+ year useful life
• You plan to hold long-term — minimizing impact of prepayment penalty
• Rate predictability matters — fixed CDC portion protects against rate increases

Real-World Decision Scenarios

Scenario 1: Manufacturing Expansion

Situation: You need $2M total — $1.5M for a new facility and $500,000 for working capital and inventory.

Answer: You need both programs, or just 7(a). 504 can fund the real estate but not working capital. You could do a 504 for the building and a separate 7(a) for working capital, or do one 7(a) for everything (simpler but likely higher blended rate).

Scenario 2: Restaurant Property Purchase

Situation: You are buying a $1.2M building for your restaurant. You will occupy 100% of the space.

Answer: 504 is likely better. Lower down payment ($120,000 vs. potentially $240,000 with 7(a)), fixed rate on 40% of the loan, and potentially lower blended rate.

Scenario 3: Competitor Acquisition

Situation: You are acquiring a competitor for $800,000, including $400,000 in goodwill, $200,000 in inventory, and $200,000 in equipment.

Answer: Must use 7(a). The 504 program cannot finance goodwill or inventory. Business acquisitions are 7(a) territory.

Scenario 4: Mixed-Use Property

Situation: You are buying a $2M property. You will occupy 55% and lease 45% to tenants.

Answer: 504 works because you meet the 51% occupancy threshold. If you only occupied 45%, you would need 7(a) or conventional financing.

The Prepayment Consideration

This is often overlooked but matters significantly:

Decision Summary