Frequently Asked Questions
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SBA 7(a) and 504 loans are two popular loan programs offered by the U.S. Small Business Administration (SBA) to assist small businesses with financing. They serve different purposes and have distinct characteristics:
1. SBA 7(a) Loan:
- Purpose: SBA 7(a) loans are a general-purpose loan program designed to support small businesses in various ways. These loans can be used for a wide range of business needs, including working capital, purchasing equipment, refinancing debt, and more.
- Loan Amount: SBA 7(a) loans have a maximum loan amount of $5 million, although the actual loan amount can vary based on factors such as the borrower's creditworthiness and the lender's policies.
- Use of Proceeds: The use of proceeds from 7(a) loans is quite flexible, allowing businesses to address a variety of financial needs.
- Terms and Interest Rates: The terms and interest rates for 7(a) loans can vary, but they generally have competitive rates and longer repayment terms than conventional loans.
- Lender: SBA 7(a) loans are issued by participating SBA-approved lenders (banks, credit unions, etc.). The SBA provides a guarantee to the lender, reducing their risk and making it easier for small businesses to secure financing.
2. SBA 504 Loan:
- Purpose: SBA 504 loans are specifically intended to assist small businesses in acquiring real estate and long-term fixed assets, such as land, buildings, and machinery. This program promotes economic development, job creation, and community revitalization.
- Loan Amount: SBA 504 loans can provide substantial financing, often reaching into the millions of dollars. They typically cover up to 40% of the total project costs.
- Use of Proceeds: SBA 504 loans are earmarked for the acquisition, construction, or improvement of owner-occupied commercial real estate or the purchase of long-term machinery and equipment.
- Terms and Interest Rates: The terms and interest rates for 504 loans are typically fixed and have longer maturities, making them suitable for financing real estate and capital assets.
- Lender: SBA 504 loans involve a Certified Development Company (CDC) and a traditional lender. The CDC provides up to 40% of the project costs, while the lender offers up to 50%, and the borrower contributes at least 10%. The SBA's role is to guarantee the CDC portion.
In summary, SBA 7(a) loans are versatile and can be used for various business purposes, whereas SBA 504 loans are specifically for real estate and equipment financing. The choice between the two depends on the unique needs of the business and the intended use of the funds. It's advisable to work with an experienced SBA lender to determine which loan program is most appropriate for your small business.
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There is no minimum credit score requirement for an SBA loan, however, the SBA requires written explanations for any negative credit history. Although there is no minimum requirement, the Lender may deny your application due to personal credit issues.
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The SBA offers loan guarantee programs like the 7(a) program, which don't always require traditional collateral. While it's common for lenders to ask for collateral, they will also consider other factors, such as your creditworthiness, business plan, cash flow, and management experience. If you have a strong business proposal and can demonstrate your ability to repay the loan, you may still qualify for an SBA 7(a) loan without a significant amount of collateral.
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The SBA allows a “blended term” based on percentage of loan proceeds. For example, if $1,000,000 in loan proceeds is to be used to purchase commercial real estate and $300,000 is to be used for working capital, the term would be (25 years x 77%) + (10 years x 23%) = 19.25 + 2.3 = 21.55 years.