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SBA Loans
504 & 7(a)

SBA financing is a subsidy program for small-business owners, not a passive-investor product. Used correctly — for owner-occupied commercial real estate that houses a business — it delivers 10% down, 25-year fixed, and rates near Treasury. Used incorrectly, it triggers owner-occupancy violations, recourse personal guarantee enforcement, and SBA default procedures.

SBA 504 — fixed asset long-term

  • Structure. Three-party: bank lender (50% first lien), CDC Certified Development Company (40% second lien debenture), borrower (10% down).
  • Max project size. $5M SBA-guaranteed portion (total project $12.5M+ possible with larger first mortgage from bank).
  • Term. 25 years on real estate (10 or 20 years on equipment). Fixed rate on CDC portion tied to Treasuries.
  • Rate. 2026 CDC debenture ~5.5–6.5% fixed. Bank first mortgage varies (typically 6.5–7.5%).
  • Down payment. 10% standard. 15% for special-purpose property (restaurant, hotel, car wash, self-storage, gas station). 20% for new business under 2 years.
  • Eligible uses. Purchase owner-occupied commercial real estate, new construction, equipment, renovation. NOT working capital, NOT refinancing except under specific 504-refinance program.

SBA 7(a) — general purpose

  • Max loan. $5M SBA guaranteed (75–90% of loan).
  • Term. Up to 25 years on real estate, 10 years on equipment, 7 years on working capital.
  • Rate. Typically WSJ Prime + 2.25–4.75% (based on loan size). Variable or fixed. 2026 range 9–12%.
  • Down payment. 10–15% typical for real estate.
  • Uses. Real estate, equipment, working capital, business acquisition, debt refinance. Flexible but rate higher than 504.

Eligibility

  • Operating business. US-based, for-profit, operating business. Not a passive investment vehicle.
  • Size standards. Per NAICS code, typically net worth < $15M and average net income < $5M over last 2 years.
  • Owner-occupancy. 51%+ existing building, 60%+ new construction, for tenant’s own business. Remaining space can be leased out.
  • Credit and character. No prior US government loan defaults. Felony convictions reviewed case-by-case.
  • Personal guarantee. 20%+ owners must sign personal guarantee (full recourse).

What SBA does NOT allow

  • Passive real estate investment. Pure rental property doesn’t qualify. Tenant must be your business.
  • Flipping. Short-term speculative holding.
  • Life insurance companies, religious organizations, lobbying firms, gambling (except limited cases), adult businesses.
  • Pyramid sales.

Fees

  • SBA 7(a) guarantee fee: 2.5–3.75% of guaranteed portion
  • SBA 504 CDC fee: ~1.5% of debenture + CSA servicing
  • Bank origination: 1–2% typical
  • Appraisal: $3k–15k depending on property type
  • Phase I ESA: $2.5k–5k (required on commercial property)
  • Legal and closing: $3k–10k
  • Total closing costs: 3–6% of loan typical

Timeline

60–90 days typical. Add 30+ days if Phase II environmental, complex construction, or SBA loan queue. Breakdown:

  • Application to bank: 1–2 weeks
  • Bank underwriting: 2–4 weeks
  • SBA submission and approval: 3–6 weeks
  • Appraisal and environmental: concurrent, 3–5 weeks
  • Closing: 1–2 weeks

SBA 504 vs. 7(a) choice

For owner-occupied CRE, 504 almost always wins — lower rate, fixed 25-year, and CDC debenture insulates from rate cycle. Use 7(a) when:

  • Project includes working capital or operations beyond real estate
  • Property is under SBA 504 minimum size ($500k typical)
  • Business profile doesn’t fit CDC requirements
  • Need for faster closing (7(a) can close in 45 days)

Common pitfalls

  • Owner-occupancy violation. Business vacates, property rented to third party full. Triggers SBA call on loan. Re-occupy or refinance out.
  • Passive investment disguise. "My management LLC is the tenant." If the LLC has no genuine operating business, SBA will audit and deny.
  • PG enforcement. Business fails. SBA pursues personal guarantee — wage garnishment, bank levy, lien on personal assets. Not dischargeable in Chapter 7 if fraud.
  • SBA loan default flagging. Default on prior SBA loan permanently bars you from future SBA financing and bars CAIVRS (federal government borrower database) clearance for FHA/VA residential.
  • Approval queue delay. SBA backlog in some years. Plan on 90+ days.
  • Environmental surprise. Phase I identifies REC. Phase II confirms contamination. SBA requires remediation before close. $100k+ unexpected cost.
  • Prepayment penalty on 504. 504 CDC debenture has declining prepay penalty in early years. Refinancing before year 10 can be expensive.
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