When you’re a small business owner seeking to expand operations, securing the right financing is essential. The SBA offers two popular loan programs that support different types of business needs: the SBA 504 loan and the 7a loan. Both can be powerful funding tools, but their structures and ideal use cases differ. Below, we’ll break down both options to help you decide which one aligns best with your business goals.
SBA 504 Loans: Best for Fixed Assets
The SBA 504 loan is designed for businesses planning to make large capital investments. It’s especially well-suited for purchasing real estate, major equipment, or renovating existing facilities. This loan type involves two lenders—typically a Certified Development Company (CDC) and a conventional lender—each covering a portion of the loan, with the borrower usually contributing 10%.
A major benefit of the SBA 504 loan is the potential for long-term, fixed-rate financing with below-market interest rates. For business owners with specific, high-cost infrastructure goals, this loan offers structured, reliable funding. However, it lacks flexibility and isn’t ideal for those in need of general-purpose financing.
7a Loans: Flexible Funding for Growing Businesses
The 7a loan is the most commonly used SBA loan due to its versatility. Business owners can use a 7a loan for a variety of purposes, including working capital, inventory purchases, or refinancing existing debt. According to Fundera, 57% of small business loan applicants seek $100,000 or less, well within the range of a 7a loan, which offers up to $5 million.
This flexibility makes the 7a loan a smart option for businesses that need to adapt quickly or fund diverse operational expenses. While interest rates can be slightly higher, the ability to use the funds across different needs often outweighs that concern.
How to Choose the Right Option
If your primary goal is to invest in fixed assets and benefit from lower rates, the SBA 504 loan may be the right fit. If you need broader financial support or are launching a new venture, the 7a loan offers the freedom to tailor funding to your needs. Both options have specific advantages—your choice should reflect your business strategy and financial situation.
Understanding the differences between SBA 504 and 7a loans can help you make a more informed decision and avoid costly missteps. Whether you’re funding a large purchase or looking for flexible working capital, aligning your loan choice with your goals is key. Ready to explore your best financing option? Contact us at Michigan Certified Development Corporation today and take the next step toward achieving your growth goals.