Key Insight
If you're buying a business that includes commercial real estate, the 504 program often provides better terms on the real estate component than the 7(a) — lower rates, longer terms, and fixed payments.
504 vs. 7(a): When to Use Each
SBA 7(a): Business acquisitions (goodwill, working capital, inventory, intangibles). Flexible use, higher rates, variable or fixed, up to $5M.
SBA 504: Fixed asset acquisition — commercial real estate and equipment over $150K. Lower rates, fixed 20-25 year terms on real estate, up to $5.5M (more in some cases).
Combined structure: When an acquisition includes real property, some buyers structure a 7(a) for the business acquisition and a 504 for the real estate — optimizing rate and structure for each component.
The 504 Structure
The 504 loan involves three parties:
- First mortgage lender (bank): 50% of project cost, conventional loan
- Certified Development Company (CDC): 40% of project cost, SBA-backed 504 debenture at fixed long-term rates
- Buyer: 10-15% equity injection (10% for established businesses; 15% for startups or special-use properties)
CDCs are nonprofit intermediaries that administer the 504 program. There are approximately 270 CDCs nationwide.
Rate Advantage
504 debenture rates are tied to 10-year Treasury notes and have historically been 1-2% below conventional commercial real estate loan rates. On a $2M commercial property with a 25-year term, this rate advantage can represent $100K+ in interest savings over the life of the loan.
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