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A SBA 504 loan is one of the lesser known SBA loan programs that small businesses can use for business funding.  In most cases, when someone suggests that you get an SBA loan, they are usually recommending that you get an SBA 7(a) loan.  SBA 7(a) loans are much more popular than SBA 504 loans.  One of the main reasons is that they have fewer restrictions on what they can be used for.  In addition, 7(a) loans usually have better rates and terms than 504 loans.

SBA 504 Loan

Pros and Cons of an SBA 504 Loan to Fund Your Small Business 

So why would you get an SBA 504 loan rather than a 7(a) loan?  One major reason some business owners apply for an SBA 504 loan rather than a 7(a) loan is because the collateral requirements are much less for a 504 loan compared to a 7(a) loan.  With SBA 504 loans, collateral is usually limited to the project assets that are financed by the loan and other related fixed business assets.  In contrast, 7(a) loans often require the borrower to put up additional assets such as inventory, accounts receivables, home equity, and other personal assets.

Another reason why some business owners prefer 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) loans, the maximum loan amount is $5 million.  In contrast, SBA 504 loans have no maximum limit.  It is important to point out that the reason why a 504 loan has no limit is because it’s a hybrid loan.  With a 504 loan, up to 40% of the financing is provided by a Certified Development Company and guaranteed by the SBA. The rest of the debt financing is a conventional loan provided by a private lender.  The portion of the 504 loan guaranteed by the SBA does have an upper limit of $5 million. However, there is no maximum limit imposed on the conventional loan portion of the financing.

One of the main drawbacks to a SBA 504 loan is that 50% or more of the financing is a conventional loan.  Because the Small Business Administration does not put any restrictions on the terms, fees or interest rates of these loans, private lenders are free to charge whatever the market will bear.  In most cases, however, the interest rates are better than traditional conventional loans.  The main reason for this is because the SBA subordinates their loan to the conventional loan.  As a result, if the borrower defaults, the private lender is paid first from the proceeds arising from liquidation of the collateral.  Therefore, the private lender has more protection from a default compared to loans where they are providing 100% of the financing.

One other disadvantage of SBA 504 loans is that they can only be used for purchasing fixed assets.  SBA 504 loans cannot be used to purchase inventory or goodwill.  In addition, proceeds from these loans cannot be used for working capital.  If you need financing for any of these purposes, you will need to consider an SBA 7(a) loan.

SBA 504 loans are mainly used for business growth and expansion.  Common uses of 504 loans are for purchasing commercial real estate such as land and existing buildings.  They are also often used for building renovations, landscaping or putting in utilities. Another common use of SBA 504 loans is for purchasing machinery and equipment that has an expected life-span of 10 years or more.

In summary, the main reason why a borrower would potentially prefer a SBA 504 loan over a 7(a) loan is because it has less collateral requirements.  The other reason would be because the financing requirements exceed the $5 million maximum limit of the 7(a) loan program.  In most cases, however, SBA 7(a) loans are preferable to the 504 because they are more flexible and offer better rates and terms.

When you apply for an SBA loan, you need to understand that you don’t submit an application directly to the SBA.SBA loans are instead dispensed by banks and other special finance companies. Previously, the main source of SBA loans for small businesses were community banks.This source of SBA loans has drastically declined as result of a large number of community banks going out of business over the last twenty years.At the same time, the large banks that now dominate the banking industry do not want to bother with small business lending.The good thing is that non-bank SBA loan providers are rapidly filling the void in small business lending.Newtek is a good example of one of these non-bank lenders.Founded in 1994, Newtek has become the largest non-bank SBA lender in the United States.Newtek was also ranked as the 6th most active SBA 7(a) lender of all loan providers, including banks, by the SBA.  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 easy.  Newtek completes all of the SBA loan application documents for you.

Written by: Mark J. Krupp, Cofounder of



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