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In this video, I will show you the main differences between the SBA 504 loan program and the 7A loan program, two of the most popular loan programs for business owners by the SBA.
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A couple of weeks ago, I did a full video on the 504 loan program and last week I released a video talking about the 7A loan program. Today, we’re going to look at the difference and similarities between the two. If you haven’t watched any of them, I strongly suggest you do so you will make this video in context. It will help a lot better. The link for both videos will be at the end of this video. Stay tuned, watch it to the end, and you should be able to click both. I would encourage you to save all three of them, because they’re very, very powerful.
We’re going to start with the main differences. There are four of them. Number one is the amount you can borrow. With the 504 loan program, you can get as little as $125,000, and you can get all the way up to $20 million. That’s right. Up to $20 million for a project. With the 7A loan program, you’re capped at $5 million. It’s important that you know how much money you can get with either.
Number two, use of proceeds. In other words, what you can use the money for. With the 504 loan, you can use it only for two things, and that is commercial real estate that is owner-occupied and heavy equipment. With the 7A loan program, you can use it for business acquisitions, you can use it for working capital, partner buy outs, real estate, and equipment. Yeah, that’s right. You can also use it for real estate. It is a whole lot more flexible than the 504. Again, the 504 is mostly for commercial real estate that is owner-occupied and heavy equipment. You can use the 7A for the rest.
Number three, interest rates. This is an important one, and pay attention. It’s either going to be variable or fixed interest rate. With the 504 loan, it’s going to be a fixed interest rate for the duration of the loan after 25 years. But if you remember from the video on the 504 program, it’s a blended rate. You’re going to get the first with a participating bank that is maybe at the 25 years, and then the second it’s going to be with the CCD, that Certified Community Development organization that is going to actually guarantee the 40% or the 50, 40, 10. And that one has a length of about 20 years. The blended is 23. More on that. That’s why I want you to watch the other video.
The 7A is a variable interest rate. Think about what are you going to invest it for? Now, the biggest difference and usually what comes up is why I cannot not buy commercial real estate with a 7A loan for the simple reason that when you buy a fixed asset like commercial real estate, you want to have fixed payments. If you’re buying real estate for your business and you want to go from renting to owning, you want to have a predictable fixed payment. You’re not going to have that with a 7A loan. It’s going to be prime plus a couple of points, and it’s going to be variable. That means that it’s going to go up and down with the fluctuations of the market. You do not want a fixed asset with a variable interest payment. Those are the main differences in the interest rate.
Number four, collateral. The 504 only collateralizes either the real estate that you’re financing or the heavy equipment that you’re purchasing. The SBA will put a lien on either the real estate or the equipment, nothing more. The 7A loan program by law, by statute is a fully collateralized loan. This means that they will be UCC filings. There will be life insurance as a condition of the loan, to have life insurance on the owners. There’ll be liens on your personal residence, accounts receivable, and last but not least a personal guarantee.
Now, a personal guarantee … I’ll discuss that in a little bit later, because it’s more of a similarity than a difference. But if you’re trying to compartmentalize risk, the 7A is not a good idea because you want to limit your exposure as much as possible. If you want to get commercial real estate, definitely the 504 is your choice.
Now let’s look at the similarities between the two loans. All right. Number one, both loans require personal guarantees from the borrowers. And anybody who owns 20% or more of a membership in a LLC or shares in a corporation, whether they’re a small corporation or a C corporation. But you know what? Personal guarantees is just par with reality. The reality that you live today is that if you go to any bank and you’re not dealing with SBA, you’re still going to have to personally guarantee the loan or the line of credit. You just have to get used to the fact that if you’re going to get a loan from the SBA, you’re going to have to personally guarantee it.
What does that mean? That if the business doesn’t do well, and it goes out, and it folds, and you basically go out of business, you still have personal responsibility on that loan. It’s good to know that with eyes wide open. When you’re pursuing a loan that is backed by the government, you will have to personally guarantee it. That’s different than collateralizing the loan that I said earlier.
Number two, both loans have prepayment penalties. And you’re wondering why is it a prepayment penalty? Well, you’re probably not going to get a better interest rate anywhere else. For the privilege of having a 2.4 loan on a 504 assuming that it’s fixed that you’re not going to be able to get anywhere else, there’s got to be some give and take. The SBA will put a condition on your loan [inaudible 00:06:52] that you cannot refinance for the first three years. That if you prepay … there are limits as to how much you can prepay. I don’t know exactly what that is. But it is one up to two, three percent of the loan you can not prepay until that prepayment cross over.
Number three, you can use the two loans for the same projects. Say, for instance, you were trying to build a ski resort in some area in your state where there’s snow, and you need it to have as much capitals as you could. For instance, you could actually use the 504 loan to get the real estate and the construction of it. So, basically buy the land, construct the building, and get the heavy equipment all wrapped up into the 504. And you can use the 7A for everything else. You can use the 7A for the working capital. You can use the 7A for acquiring all the things that are not necessarily covered by the 504 so that both loans are complimentary. Isn’t that cool?
Nowhere else will you have that much. And I forgot to say that earlier in the 504 loan is the only loan in the market that only allows you to put 10% down. Yeah, that comes with some strings attached. If you’re looking at a 10,000 square foot building if you wanted to buy a commercial, a office space building, you have to occupy 51% of that space. Anyway, so just to recap, the similarities … one, both requires personal guarantees. Both loans have prepayment penalties, and you can use both loans on the same project. Hopefully this video was helpful to you. Thank you so much.
Please comment below and let me know which of these two loans will you take and why. Love to hear your comments. Also, if you want to join a community of like-minded successful entrepreneurs just like you, then join our Facebook group at the link below where I share tips, tactics, and strategies on how my clients are growing their businesses to seven figures and beyond.
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