Using an SBA 504 Loan For Debt Financing

Written by: Mark J. Krupp, Cofounder of

The SBA provides a variety of SBA loan programs which can be used for funding small businesses. One SBA loan program which is less commonly known, but serves a certain funding need, is the SBA 504 loan. Typically, whenever most individuals mention that they’re obtaining an SBA loan, it’s almost always an SBA 7(a) loan. SBA 7(a) loans are far more popular compared to SBA 504 loans. One of the primary reason behind why small business owners want a 7(a) loan over a 504 loan is because the SBA 7a) loan has much fewer rules regarding what the money can be utilized for. Furthermore, 7(a) loans usually have much better interest rates and terms than 504 loans.

SBA 504 Loan

Using an SBA 504 Loan For Debt Financing

Another reason why some small business owners desire a SBA 504 loan over a 7(a) loan is because their financing requirements exceed the maximum loan limits of a SBA 7(a) loan. With 7(a) lloans, the maximum amount you can borrow is $5 million. SBA 504 loans don’t have a maximum limit. The reason why a 504 loan has no limit is because it’s a hybrid loan. With a 504 loan, as much as 40% of the funding is provided by a Certified Development Company and secured by the Small Business Administration. A private lender provides the rest of the debt financing. There is an upper limit on the financing that is guaranteed by the Small Business Administration. The SBA does not impose loan limits on the part of the funding that’s a traditional loan.

There are a few circumstances when an SBA 504 loan might be a better option than a 7(a) loan. One major reason a number of small business owners request an SBA 504 loan rather than a 7(a) loan is mainly because the collateral demands are a lot less for a 504 loan compared to a 7(a) loan. The SBA usually only requires that the assets obtained with the 504 loan as well as other fixed business assets be used to collateralize the loan. SBA 7(a) loans, on the other hand, have significantly higher collateral requirements. Often, the SBA will require the borrower to put up their merchandise, accounts receivables, home equity and other personal assets as collateral in order to receive a 7(a) loan.

One of the major drawbacks of SBA 504 loans is that 50% or more of the financing is a traditional loan. Given that the Small Business Administration doesn’t put any restrictions on the terms, fees or rates of these loans, private lenders are free to charge whatever the market will bear. The rates of interest are usually better than 100% traditional loans, however. Private lenders normally decrease the interest rates on these loans because the SBA 504 loan is subordinated to their loan. This then puts them in first position to be paid from liquidation of the collateral if a borrower defaults on the loan. As a result, the private lender has much more protection from a default when compared with loans where they’re supplying 100% of the funding.

Another reason that SBA 504 loans aren’t as well liked as 7(a) loans is that the funding is restricted to purchasing long-term fixed business assets. SBA 504 loans may not be utilized to obtain inventory or goodwill. Furthermore, proceeds from these loans may not be used for working capital. IIf you will want financing for any of these purposes, you’ll have to look into an SBA 7(a) loan.

The principle purpose of SBA 504 loans is to provide money for business growth and improvements. Common uses of 504 loans are for obtaining commercial real estate such as land and existing buildings. One other use of 504 loans is for building improvements, landscaping or for putting in utilities. SBA 504 loan proceeds may also be used to buy equipment or machinery. The only stipulation to using 504 loans for this purpose is that these items have to have an expected lifespan of at least 10 years.

In conclusion, SBA 7(a) loans are preferred over 504 loans except in cases where the borrowers are having difficulty fulfilling the more rigorous collateral requirements of the 7(a) loan. The only other reason why a borrower may choose an SBA 504 loan instead of a 7(a) loan is that their funding requirements are more than the $5 million permitted by the SBA 7(a) loan program. Otherwise, SBA 7(a) loans are superior to 504 loans simply because they possess less limitations and due to their offering better rates and loan terms.

It’s important to realize that you don’t go to the Small Business Administration for an SBA loan. You must apply to banks or other special loan providers for SBA loans. In the past, community banks were the primary suppliers of SBA loans. Unfortunately, a large number of community banks have gone out of business during the last twenty years. Therefore, this source of SBA loans has drastically decreased. At the same time, the big banks that now dominate the banking industry do not want to bother with small business loans. The good thing is that non-bank SBA loan providers are quickly filling the void in small business financing. One example of these non-bank SBA lenders is Newtek, the small business authority. Newtek was initially launched in 1994. Since that time, it has grown to become the biggest non-bank SBA lender in the United States. In 2013, the Small Business Administration ranked Newtek as the 6th most active SBA 7(a) lender of all loan providers in the United States. In most cases, Newtek can get you pre-qualified for as much as five million or as little as fifty thousand dollars within 48 hours. The application process is simple. Newtek completes all of the loan documents for you.

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