SBA 7(a) vs. SBA 504 — Which Loan Is Right for Your Business Acquisition?
Business buyers exploring SBA financing typically encounter two primary programs: the 7(a) loan and the 504 loan. They serve different purposes and are appropriate for different types of transactions. The SBA’s fund your business resources describe the general parameters of each. This post focuses on the practical differences in the context of business acquisitions in New Jersey and New York.
The SBA 7(a) Loan
The 7(a) is the SBA’s most flexible program, used for acquiring existing businesses including goodwill, working capital, and transaction costs, up to $5 million. For service businesses or professional practices whose primary value is intangible, the 7(a) is typically the appropriate program. Rates are usually variable, tied to the prime rate plus a lender spread within SBA limits.
The SBA 504 Loan
The 504 program is designed specifically for fixed assets — commercial real estate and major equipment — and is not designed for general business acquisitions involving goodwill. It involves three parties: the buyer contributes a down payment, a Certified Development Company provides 40 percent via an SBA-guaranteed loan, and a conventional lender provides 50 percent. The CDC portion typically carries a fixed rate, which can be advantageous in a rising rate environment.
When to Use Each — or Both
For acquisitions involving both a business and the commercial real estate it occupies, a combined 7(a) and 504 structure may be appropriate. The key distinction: the 7(a) can finance goodwill and intangible value while the 504 cannot. A buyer paying $1.5 million for a business whose tangible assets are worth $300,000 needs a 7(a). Business buyers in New Jersey and New York should work with both an SBA-approved lender and a business attorney to identify the right structure.
Disclaimer
The legal and business issues discussed in this post vary depending on the specific facts and circumstances of each situation. This post is for informational purposes only and does not constitute legal advice. It is not an offer for Russo Law LLC to represent any party, nor does it create an attorney-client relationship. No action or inaction should be taken based on the information provided without seeking professional legal counsel. This post is intended for businesses in New York and New Jersey and may not reflect laws in other jurisdictions.
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