Small Business Administration (SBA) 504 loans are a popular option among small business owners who want to borrow money for their growing or established business.
The lower the down payment that’s required, the longer the terms will be. The flexible credit score requirements make them much more accessible than other forms of financing.
However, SBA 504 loans aren’t the only option out there for businesses looking to secure funding. They also come with some disadvantages when compared to alternative loan options like bank loans or private placements.
What is an SBA 504 Loan?
Small Business Administration 504 loans are a part of the agency’s program designed to assist small businesses.
The 504 loan program provides affordable long-term financing for equipment, machinery, construction, and certain real estate purchases. These loans have a 20-year repayment period with a balloon payment due at the end of that time frame, if it isn’t refinanced or paid off by then.
SBA 504 Loan Requirements
SBA 504 loans require little to no money down, but there is an established minimum amount you must take out based on your business type and location: 25% for small manufacturers, 50% for all other businesses (this includes most retail operations), or 100% when the purchase is within targeted rural communities. The total amount you can access through this type of loan is also capped at $5 million.
A minimum credit score of 680 is required for an SBA 504 loan. This means that if your business has a lower credit rating than this number, you won’t be able to use the program.
That’s not true with other types of financing options — even ones with high down payments like bank loans or private placements. Businesses that are looking at their available financing options can usually qualify for these more easily because they don’t require as much money up front as 504 loans do.
What are the interest rates?
Interest rates for 504 loans are set by the government, and they vary depending on the credit score of your business and the amount you’re borrowing. Typically, the rate is around 3% to 4%, which is significantly lower than what you would pay with a bank loan or a private placement.
Repayment terms are typically within 10 to 20 years, with a balloon payment due at the end of the term if it’s not refinanced or paid off. This gives businesses plenty of time to repay the loan without putting too much strain on their budget.
SBA 504 vs. 7a Loans
So what is an SBA 7a loan? SBA 7a loans are another type of SBA loan program, but they’re less advantageous than 504 loans when it comes to borrowing money for your business. One of the primary differences is the way that 7a funds are typically allocated vs. 504 funds.
That is, with a 504 loan you can use the money on any type of commercial equipment you need — furniture, computers, inventory, real estate purchases, etc. With 7a loans, however, the funds must be used for new or used equipment with at least 75% of its value tied to manufacturing processes. When looking at SBA 504 vs. 7a loans, many people opt for 504 loans because of their flexibility.
SBA 504 Loans vs. Private Lenders
The flexibility offered by SBA 504 loans makes them attractive options for many small business owners who want to finance their growing business with an accessible fund source.
However, private lenders offer significant advantages over 504s when it comes to interest rates and repayment terms for some businesses. These include credit score requirements, reduced interest rates, and flexible years of repayment.
SBA 504 Loans vs. Other Loan Options
Here’s how SBA 504 loans stack up against other options you may have available to you:
With a SBA 504 loan, you’ll be required to put down just 10% of the total amount you borrow. This is much lower than the 20 to 30% that’s generally required for a 7a loan.
SBA 504 loans offer longer terms than 7a loans, with repayment periods of up to 25 years compared to just 10 years for a 7a loan. This can be a major advantage if you need more time to repay your loan.
The interest rates on SBA 504 loans are usually slightly higher than those on 7a loans, but they’re still competitive compared to borrowing from traditional lenders.
Credit Score Requirements
The credit score requirements for SBA 504 loans are typically higher than the ones required for 7a loans, but lower than those that a bank would require you to have in order to qualify for a small business loan.
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Even though there are some distinct disadvantages with SBA 504 loans, they still remain one of the most popular options available among small business owners who want to borrow money for growth and expansion. They also offer many benefits over other types of financing, especially when it comes to having very low down payment requirements and long repayment terms.
LendThrive provides borrowers with fixed rate business loans that can be used for many purposes, including building improvements, acquisition financing, renovation and expansion, exchange purchases, partner buyouts, and more.
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