The requirements for a 7(a) loan are very similar to those for a 504 loan. Borrowers must demonstrate that they need the money and must exhaust all other financing options before applying for a 7(a) loan. Borrowers must also demonstrate that they meet SBA criteria for small business eligibility. All borrowers must be U.S. for-profit businesses.
There are no credit criteria, but like other SBA programs, borrowers must have a good credit score and credit report, and be free from foreclosure, bankruptcy, and default on government-guaranteed loans. Any negative items reported need to be explained to the lender in order to qualify for a 7(a) loan. A minimum score of 680 is recommended for all applicants. Learn more about how to improve your credit score to qualify for SBA loans and other financing options.
Documents required to apply for a SBA 7A Loans include, but are not limited to, federal tax returns, financial statements, income tax returns, and balance sheets. When using loan proceeds to purchase real estate, a real estate purchase agreement is required. To refinance debt with a 7(a) loan, notes, leases, and payment records for the past 3 years are required.
SBA 504 VS 7(a) Loans: Comparison of Rates and Terms
The maximum amount that can be borrowed under the SBA 504 loan program is $ 5 million. The SBA-approved CDCs will lend up to $ 5 million to cover 40% of the total cost of the project. As mentioned earlier, another lender will receive 50% of the cost, while the lender will finance the remaining 10%. With program 7 (a), you can borrow $ 5 million from an SBA-approved lender.
The terms of a SBA 504 Loans vary depending on how the loan proceeds are used. The repayment period for equipment purchases is 10 years, while the maximum period for real estate is 20 years. SBA 7(a) loans also have different terms, depending on how the funds are used. The repayment period for equipment is up to 10 years, while the period for real estate purchases is 25 years.
Interest rates on 504 loans are based on 5-year and 10-year Treasury bond issuance rates. Interest rates on the remaining 50% offered by other lenders will vary. 7(a) The interest rate on the loan is based on the prime rate plus an additional percentage not to exceed 6.5%. The interest rate is determined by the repayment terms and the amount borrowed.
Depending on the lender’s policy, borrowers who get a 504 loan may be subject to various fees. This includes up to a 3.5% origination fee, packaging fee, brokerage fee, and closing fee. Fees may be added to the cost of the loan.
SBA 7(a) loans come with a guarantee fee, but for loans of $150,000 or less, there is no guarantee fee. For any amount over $150,000, borrowers will be charged up to 3.75% of the total loan amount. Additional charges may be assessed, including but not limited to assembly, packaging, and warranty assessment fees.
Personal guarantees and guarantees
SBA 504 loans require all owners of a 20% or more business to sign a personal guarantee. Generally, a guarantee is not required. Instead, financing projects serve as collateral for these loans.
Personal guarantees from all owners are also required when applying for a loan 7 (a). No deposit is required for loans of $ 25,000 or less. Loans up to $ 350,000 are subject to the lender’s policy. Debts over $ 350,000 will require a sufficient amount of credit to assess the total debt. The personal estate can be used if commercial homes are not available to fully secure the loan. It is also important to note that a representative does not reject an application simply because of a lack of security.
SBA 504 loans require a down payment. Usually, this amount is only 10%. However, in some cases, such as a start-up that is 2 years old or less, the down payment can be as high as 30%. The SBA 7(a) loan program also requires a down payment. The down payment on this loan program is usually 10%.