7a vs 504 comparison[2] - SBA Complete

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SBA 7a vs. 504

Loan Size:

7a:

$5,000,000 is the maximum loan amount

504:

$5,000,000 CDC Debenture maximum (typically representing 40% of the total project)

Term:

7a:

up to 25 years for real estate

up to 10 years for working capital, inventory, equipment

504:

up to 20 years for real estate

up to 10 years for equipment

Use of Proceeds:

7a:

real estate, construction, business acquisition, equipment, inventory and working capital

504:

real estate and equipment, construction

CDC Debenture will not fund until the total project is fully disbursed

Structure:

7a:

The required equity contribution is a credit decision of is up to the bank

The bank must document that the business is adequately capitalized.

For business acquisitions, if intangible assets are $250,000 or greater, the injection must be

25% to be processed through Preferred Lender procedures

504:

Standard

New business or New business and

Special purpose Special purpose

property

property

Borrower down

10%

15%

20%

Third Party loan

50%

50%

50%

CDC/SBA

40%

35%

30%

Prepayment Penalty:

7a: If the loan term is 15 years or more, the prepayment penalty occurs for 3 years declining

5%, 3%, 1% of the prepayment amount if the borrower prepays more than 25% of the

outstanding balance.

If the loan term is less than 15 years, there is no prepayment penalty.

The prepayment penalty is payable to SBA (not to the lender).

504:

The conventional loan prepayment is determined by the lender on the first mortgage loan.

The CDC loan prepayment is triggered if the borrower prepays during the first half of the

term.

This penalty is equivalent to one year's interest in the first year of the loan term,

declining to zero at the midpoint of the loan term.

Fees:

7a:

Guaranty Fee based on guaranteed portion of the loan

2% for loans $150,000 or less

3% for loans $150,000--$700,000

3.5% for loans over $700,000

If the guaranteed portion exceeds $1,000,000, an additional guaranty fee of .25% is charged

504:

Conventional loan fees

0.50% of the third party loan to CDC

3% fee on the debenture

Borrower Benefits:

7a:

? SBA 7(a) offers more flexibility for loans with a mixed use of proceeds.

SBA will allow the

bank to finance intangible assets, working capital and inventory.

? The term for a 7(a) can be determined by maximum term for the assets class comprising the

largest use of proceeds, with no call provisions or balloons.

Example: $500,000 to buy a

building, $350,000 for equipment would qualify for a 25--year term.

? SBA 7(a) only has a 3--year prepayment penalty for loans 15 years or more and no

prepayment penalty for loans less than 15 years.

? The bank has the option to offer a fixed

or variable rate option

504:

? SBA 504 allows the financing of much larger projects than 7(a).

If the borrower needs a

loan larger than $5MM and the proceeds are for long--term assets, the total project can be

$12,500,000.

? The CDC debenture is priced at a fixed rate.

? The equity injection can be limited to 10% on the total project.

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