Appropriate Uses of Funds

Borrowers can use 7(a) loans for:

• Long- or short-term capital needs.
• Revolving funds for inventory and receivables.
• Purchases of equipment, machinery or furnishings.
• Real estate purchases, both undeveloped and developed.
• Building new facilities or updating existing ones.
• Launching a new venture or acquiring and or expanding an existing business.
• Refinancing prior business debt, only in specific situations.

The main restrictions on these loans are that the borrower cannot buy property solely as an investment or use the funds to pay back or buy out other investors.

Borrowers can put 504 loans towards:

• Purchasing real estate, with or without buildings.
• Paying for improvements, such as grading, streets, utilities, parking and landscaping.
• Building new facilities or modernizing, renovating or converting existing ones.

These funds cannot be spent on working capital or inventory; consolidation, repayment or refinancing of debt; or rental real estate investment or speculation.

Amounts, Fees & Interest Rates

The SBA has set the cap for both 7(a) and 504 loans at $5 million. In 2012, the average 7(a) loan was $337,730. The 504 loan program also has job creation and public policy requirements which affect the amount of funding a borrower can request which are detailed in the blog on how a 504 loan can benefit your business.

For 7(a) loans, the only fee assessed is a guarantee fee. This is paid by the lender, who has the option of passing it on to the borrower. This fee can be incorporated into the loan. The fees are assessed based on loan term and amount: one year or less is .25 percent of the guaranteed portion; for over one year, up to $150,000 is 2 percent, $150,000 to $700,000 is 3 percent, and over $700,000 is 3.5 percent. An additional .25 percent fee is assessed on guarantees of $1 million or more. Both fixed and variable rates are available, with the final rate negotiated between borrower and lender. The final rate will have a base and an acceptable spread which will not exceed the SBA’s established limits. This program can guarantee loans of less than $150,000 up to 85 percent and loans of over $150,000 at 75 percent. Loans that are guaranteed through SBAExpress can only receive a 50 percent guarantee.

The 504 loan fees come to around 3 percent of the backed funds and, like the 7(a), can be financed alongside the loan. The interest rates for this program are set at a specific increment above the current rates set by the U.S. treasury.