SBA 7(a) vs 504: which loan is better for buying a building?
For buying a building your business will occupy, SBA 504 usually wins on cost for larger purchases because its second mortgage is fixed for 20 or 25 years, while SBA 7(a) wins on flexibility, speed, and the ability to fold in working capital and equipment. Both need 10 to 15 percent down and 51 percent owner occupancy; 7(a) caps at $5 million, and 504 projects can run well above that.
Side by side
| SBA 7(a) | SBA 504 | |
|---|---|---|
| Structure | One loan from a bank, partly guaranteed by the SBA | Bank first mortgage (about 50 percent) plus a CDC second (up to 40 percent), you bring 10 to 15 percent |
| Maximum | $5 million | $5 million on the CDC portion ($5.5 million for some manufacturing and energy projects); total project often $10 million or more |
| Rate | Usually variable, prime plus a margin | Bank portion variable or fixed; CDC portion fixed for 20 or 25 years |
| Term | Up to 25 years for real estate | 20 or 25 years on the CDC portion |
| Use of proceeds | Real estate, equipment, working capital, refinancing, business acquisition | Real estate and long-life equipment; limited working capital |
| Fees | SBA guarantee fee that varies by loan size | CDC and SBA fees, usually financed |
| Prepayment | Penalty in the first three years on longer terms | Declining penalty over the first ten years on the CDC portion |
| Time to close | 45 to 90 days | 60 to 120 days |
| Best for | Smaller deals, mixed uses of funds, speed | Larger real estate purchases and construction, borrowers who want a fixed rate |
Ranges vary by lender and program year.
When 7(a) is the better fit
- The purchase is under about $2 million and you also need working capital or equipment.
- You want one lender and one closing.
- Speed matters.
- The property has some passive rental income the 504 program would limit.
When 504 is the better fit
- The real estate is the bulk of the project and the price is $2 million or more.
- You want a long fixed rate on a large piece of the debt.
- It is ground-up construction or a major renovation.
- The bank prefers the smaller first-mortgage exposure.
The occupancy rule applies to both
Your business must occupy at least 51 percent of an existing building, or 60 percent of a new build with a plan to reach 80 percent. The rest can be leased out.
What both underwrite
Business cash flow covering the new payment by 1.25 or more, your global cash flow, credit around 680 or better, two to three years of business and personal tax returns, and an appraisal. New businesses need projections and a stronger down payment.
A worked example
$3 million building purchase. Under 504: bank first of $1.5 million, CDC second of $1.2 million fixed for 25 years, your $300,000 down. Under 7(a): a single $2.7 million loan if it fits under the cap, variable rate, with room to add working capital. The 504 fixed rate on $1.2 million is the reason most borrowers choose it at this size.
How CommFi handles it
Our lending desk reads the deal and tells you which program fits and why. SBA loans fund through approved lenders that differ on speed and appetite, so the desk searches a database of 7,000+ lenders and puts the file in front of the ones active in your industry and market, and they compete. Zero upfront fees.
Related reading
Related questions
- Which is cheaper, SBA 7(a) or 504?
- Usually 504 for larger real estate, because the CDC second is fixed for 20 or 25 years. 7(a) can be cheaper on smaller deals with mixed uses.
- Can I use SBA 504 for working capital?
- Only in limited amounts. 504 is for real estate and long-life equipment. 7(a) covers working capital.
- Which SBA loan closes faster?
- 7(a), typically 45 to 90 days. 504 involves two lenders and runs 60 to 120 days.
- Do both programs require 51 percent owner occupancy?
- Yes, for existing buildings. New construction requires 60 percent at completion with a plan to reach 80 percent.
- Is there a maximum project size for SBA 504?
- The CDC portion caps at $5 million, but the bank first mortgage has no SBA cap, so total projects of $10 million or more are common.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.