Comparing SBA 7(a) and 504 Loans

• Two different programs through the Small Business Administration - what are the differences and which one works best for your project. Both are named for their specific portions of the Small Business Act and both are SBA guaranteed programs, however they have distinct differences.

  Major Differences Between 504 and 7(a) Loans
  .	7(a) Loans	504 Loans
  Amount	$1.5 million maximum guarantee. $2 million maximum loan size.	$1.5 million in many cases for between 30% - 40% of total project. $2 million, if public policy goal is met. $4 million for small manufacturers.
  Loan Structure	Funding comes from Lender; SBA provides guarantee (up to 85%).	Private lender for 1st lien for 50% of eligible project costs and SBA/CDC for 30-40%.
  Down payments	Could be as low as 0%, if there is equity in the business and/or outside collateral	10% minimum for existing businesses with multi-purpose property, 20% for startups with special purpose properties
  SBA's Participation	Funding comes from Lender; SBA provides guarantee (up to 85%).	CDC/SBA second lien is direct funding from SBA guaranteed debenture sold on Wall Street.
  Eligibility	Size standards based either on number of employees or annual sales, determined by industry. Call for details. Liquidity test.	Net worth below $8.5 million and average net income for previous 2 years less than $3.0 million or Eligibility under 7(a) size standards. Liquidity Test.
  Use of Proceeds	Working capital, inventory, fixed assets. Refinance, purchases, start ups, new construction.	Fixed assets only and related soft costs.  Cannot include inventory, franchise fee, or working capital in project costs
  Refinancing	Eligible. Must result in 20% cash flow savings.	Eligible only if the original financing was pre-noticed to CDC/SBA and was for interim financing only.
  Fees	2% SBA guaranty fee on loan of $150,000 or less. Up to 3.75% on highest amounts.	2.65% on CDC/SBA second lien  Negotiable on first lien
  Other Costs	Application Packaging fees determined by lender. Usual and customary legal and closing costs.	Legal fees generally $2,500 plus usual & customary closing costs.
  Interest Rate	Maximum of 2.75% above prime interest rate on a variable basis	1st negotiated with lender.                                             2nd fixed rate monthly by open market debenture sale on Wall Street. Mid 7% in 08/08
  Prepayment penalties	5% the first year, 3% the second, and 1% the third, with the first 25% of the loan not subject to ppp	2nd 10 year prepayment penalty based on declining balance of debenture rate.  1st negotiated with lender.
  Term	25 years maximum on real estate 7-10 years on assets other than real estate	10 or 20 years only.
  Leased Portion	New Construction: 33% Existing Buildings: 49%.	New construction: No more than 20% long term and an additional 20% short term. Existing buildings: 49%.
  Economic Impact	No requirement.	One job per $50,000 of debenture. One job per $100,000 for small manufacturers. Waived for public policy goals.

  To summarize, the following are the pros and cons connected with each type of loan:

  7(a)		504
  Pro's	Con's	Pro's	Con's
  Wider Use of Proceeds	Variable Rate	Fixed rate for 30-40% of project cost	Narrower use of proceeds
  Faster because only dealing with one lender	Smaller Deals (2MM max loan)	Larger deals (max of 2MM is for 30-40% of project cost)	Ten year Prepayment penalty time period
  More lenders today	.	.	Fewer lenders today
  Three year Prepayment penalty time period	.	.	Dealing with 2 lenders for 2 financing pieces
  One loan closing	.	.	Two loan closings

  Please feel free to call PMC for further information about your specific loan scenario. We look forward to assisting you.