Moving a 7(a) loan to the 504 Program

In the wake of the 7(a) program suspension, lenders can look to the 504 program as a replacement when loans involve owner-occupied real estate and industrial equipment. Consider a 504 loan when a borrower needs a long-term, fixed rate; requires a smaller down payment; wants to purchase a building in order to stop paying rent; or specifically wishes to purchase equipment for expansion.

SBA regularly suggests that 504 loans serve as a replacement for some 7(a) loans.

504 loans are designed specifically for small businesses with tangible net worth below $7 million and after tax profits below $2.5 million. 504 loans can be used to fund up to $1 million of a project ($1.3 million in many cases). SBA 504 loans address many of the problems that small businesses face:

Problem: Small business owners struggle with large down payment (equity) requirements.

Solution: 504 loans typically require 10 percent borrower equity, and a small business’s prior expenditures may often be counted towards this requirement.

Problem: Long-term financing can be hard to obtain.

Solution: 504 loans can be obtained for 10- and 20-year terms. Loans are also assumable.

Problem: Small business owners want to own, not rent

Solution: 504 loans can be used to acquire buildings and equipment. Many small business owners use the proceeds of 504 loans to purchase their buildings – and no longer pay rent. In many cases if a borrower occupies 51 percent of a building, it can lease the remaining 49 percent (providing an immediate income stream).

Program Description.