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In this video, Beau talks about the difference between the SBA 7a and 504 loan programs.
For your commercial real estate project, are you considering an SBA 7(a) loan vs an SBA 504 loan? It makes sense because both are government-backed lending programs that allow small business owners and lenders to achieve large and small objectives. Based on the size of the loan and the type of loan, each loan has its own set of conditions and stipulations.
In general, the SBA establishes loan restrictions to reduce the risk of default for both the borrower and the lender. Borrower requirements for SBA loans are similarly geared to get money into the hands of small businesses in need.
The main distinctions between SBA 7(a) and SBA 504 loans are in the application process. The SBA 504 loan cannot be used for a variety of things that the SBA 7(a) loan allows, but it is better suited for major commercial real estate projects that do not veer from those aims.
SBA 7(a) Loan Specifications
Let's start with the SBA 7(a) loan before moving on to the SBA 504 loan. A bank, credit union, or other traditional lending institution can provide an SBA 7(a) loan to a start-up or small business owner. To be eligible, the borrower's business must be based in the United States or a U.S. territory. Also, the proprietor of the business cannot be on parole.
The cash from the SBA 7(a) can be used for practically any reasonable business activity, including purchasing new equipment, restoring damaged real estate, expanding into new locations, normal supply costs, and so on. The SBA 7(a) loan is particularly popular among small enterprises and start-ups because of its versatility.
There is no minimum loan amount under the SBA 7(a) program, and the maximum loan amount is $5 million. The remaining terms are intended to persuade lenders to approve loans to small business owners and to help them flourish.
The Difference Between an SBA 504 Loan and an SBA 7(a) Loan
Let's begin our comparison now! The SBA 504 loan, like the SBA 7(a) loan, is a government-backed loan that can be used for real estate and land, among other things. The SBA 504 is a popular loan for land and real estate, and it includes features that make it tailor-made for that purpose.
The SBA 504 isn't known for its versatility. The money must be used according to particular guidelines, and a borrower cannot use the funds for working capital. The money must primarily be used for fixed assets. The SBA 504 can be used for the following things:
- Purchasing an existing structure. SBA 504 funding can be used to purchase a building by a business owner who is expanding into an existing site.
- Land acquisition or upgrades are two options. Street improvements, parking lots, landscaping, and utilities are all specifically listed by the SBA; for further information, contact your local SBA office.
- The building is brand new. The SBA 504 loan can be used for new construction as well as upgrades to improve existing structures.
The loan's parameters are designed to be used for land and real estate. Other financing programs may offer you better rates.
Structure and Limits of SBA 504 Loans
The 504 is frequently combined with another loan to fund significant projects. In most cases, the borrower will contribute 10% of the project's overall cost. The SBA 504 loan would fund 40% of the project, with the other 50% covered by a typical lender's loan.
When comparing the SBA 504 and the 7(a), the 504 is the larger loan. The minimum 504 loan amount is $125,000, while the maximum is $5-5.5 million, depending on the SBA's discretion. Because the 504 has a fixed interest rate and demands a fixed 10% down payment from the borrower, the benefits for large commercial real estate are obvious. The 504 has a 20-year duration for land and real estate.
In addition, rather than banks or other lending institutions, Certified Development Companies (CDCs) offer the SBA 504 credit. There are over 260 CDC offices throughout the United States, and your local CDC office will be able to provide you with additional information on borrower eligibility, down payment requirements, and other aspects of the SBA 504 loan.
What exactly is a CDC (Certified Development Company)?
The Small Business Administration (SBA) assists non-profit organizations known as Certified Development Companies (CDC). A CDC is a non-profit organization that works to encourage economic development and is governed by the Small Business Administration (SBA). On the SBA 504 loan program, banks and other financial institutions collaborate with CDCs.
A non-profit organization must petition the SBA for certification to become a CDC. The list of qualifications to be considered eligible is lengthy, however here are a few of the SBA's:
It must be a 501(c)(3) organization. Non-profit corporations are required to apply for CDC status. Prior to 1987, the Small Business Administration (SBA) certified for-profit businesses, some of which now have permanent CDC status.
It's necessary to be in good standing. To be regarded in good standing, the SBA outlines numerous conditions, including compliance with all laws and a satisfactory CDC Risk Rating. The SBA retains the right to determine whether or not a company is in good standing.
It's not possible to be an SBIC. CDC designation is not available to Small Business Investment Companies (SBIC), which are likewise certified and regulated by the SBA.
It is not possible to be associated. This criteria, like the others, has caveats, the most important of which is that a potential CDC cannot be associated with an individual or other business.
A Board of Directors is required. The Board of Directors of any corporation intending to become a CDC must have at least nine voting directors. They also placed a cap of 25 voting directors on the board. The Small Business Administration (SBA) reserves the ability to approve firms with fewer or more voting directors.
Regulations dictate how a CDC must run, when they will be audited, how they must manage revenues generated from the 504 loan, and a variety of other aspects of the business. More information on CDCs and certification can be obtained from your local CDC office.
How Do Banks Get Involved in SBA 504 Loans?
Traditional lenders, such as banks, can collaborate with local and state CDCs to offer partial finance for fixed asset projects through the SBA 504/CDC loan program. A bank or other traditional lender will normally give a loan that covers half of the total loan amount.
If you want to expedite your learning curve and make the most of the SBA financing options available to you, book a call with Beau here.