Understanding the Differences Between SBA 504 and 7(a) Loans

Businesses looking for financing to fuel their growth and expansion have an array of commercial loan options. Two of the most popular are the Small Business Administration (SBA) loan programs tailored to meet a variety of needs — the SBA 504 loan program and the SBA 7(a) loan program.

What’s the Difference Between SBA 7(a) and 504 Loans?

Each of these programs serves different needs. Companies qualify based on their annual revenue and/or number of employees, as determined by SBA size standards. Bridge Bank, a division of Western Alliance, typically uses the Alternative Size Standard, which outlines a maximum tangible net worth of $20 million and two-year average net income of no more than $6.5 million. Qualifying businesses may use one or both types of SBA loans, in certain cases.

• SBA 504 loans are geared toward helping businesses acquire or improve existing, long-lasting assets. They provide long-term, fixed-rate financing for major fixed assets such as purchasing buildings or land, constructing new facilities, buying long-term machinery and equipment or improving existing facilities.
• SBA 7(a) loans suit a wide range of purposes. They can be used for working capital, purchasing inventory, buying equipment or real estate and refinancing existing debt. The SBA 7(a) loan product is typically the SBA product used for purchasing an existing business.

These loans are very popular, with more than 70,000 SBA 7(a) loans and nearly 6,000 SBA 504 loans approved in 2024, according to the SBA. And the number is growing: During the first half of the SBA’s fiscal year 2025, approvals included close to 38,000 7(a) loans and nearly 3,000 504 loans.

Here’s a more in-depth look at each program to help you determine which SBA loan is right for your business.

Understanding SBA 7(a) Loans

The 7(a) loan program is the SBA’s primary way to provide financial assistance to small businesses.

The loans, with a maximum amount of $5 million, can be used for various purposes, including buying and/or improving real estate, working capital, debt refinancing and equipment purchases. If a loan is used for real estate, the property must be owner-occupied and meet certain occupancy percentage requirements.

In rare cases, fixed-rate terms may be available, depending on the business profile, but generally, 7(a) loans don’t have fixed rates. Fixed-rate loans maintain a stable payment amount for the duration of the term. For variable-rate loans, the required rate and payment amount may change according to interest rate fluctuations, which may occur quarterly, yearly, every three years, every five years, etc.

To be eligible, businesses must be:

• An operating for-profit business located in the United States
• Be “small” under SBA size requirements (maximum tangible net worth of $20 million and two-year average net income of no more than $6.5 million)
• Be creditworthy and demonstrate a reasonable ability to repay the loan

Various factors determine repayment terms for SBA 7(a) loans. Most term loans are repaid through monthly principal and interest payments derived from the business’s cash flow.

The SBA 7(a) product offers up to 10-year repayment terms on loans for inventory, working capital, and machinery and equipment and 25 years to repay loans for commercial real estate.  There are no prepayment penalties on loans with maturity of less than 15 years. On terms that exceed 15 years, a prepayment penalty applies during the first three years of loan repayment. In year 1, the penalty is 5% of the outstanding principal balance; in year 2, 3% of the outstanding principal balance; and in year 3, 1% of the outstanding principal balance. After year 3, no prepayment penalty will apply.

Understanding SBA 504 Loans

For businesses seeking stability and long-term planning, the SBA 504 loan offers key advantages. They can be used to buy buildings, construct new facilities and acquire long-term machinery and equipment. The funds can also be used to improve land, existing facilities and related infrastructure.

SBA 504 loans cannot be used for working capital, inventory, speculative real estate investments, financing intellectual property or consulting services soft costs.

Lenders consider the business’s projected income as well as historical cash flows.

To qualify, businesses must:

• Operate as a for-profit business in the United States
• Have a tangible net worth of less than $20 million
• Have an average net income of less than $6.5 million after federal income taxes for the two years before applying for the loan

An SBA 504 loan can have a term of 10, 20 or 25 years based on the remaining useful life of the property or equipment being financed. Businesses may qualify for multiple loans that can be refinanced.

Get an Assessment for Your Business

Bridge Bank is a preferred SBA lender, which means you could get approved for a loan faster than with other lenders. Our team can help determine whether the 504 or 7(a) loan is best for your business financing needs. To learn more, connect with a relationship manager today.