If you’re an entrepreneur, you have a fantastic resource in the Small Business Administration. The agency provides various types of loans that can help your company weather tough times or expand when the opportunity permits.

Two of the most common SBA loans are the 504 and 7a. What are the purposes of each, and when should you use one or the other?

How the SBA 7a Loan Works

The SBA 7a loan provides working capital for small businesses. You could get money for business operations or to purchase a company. This loan assists small business owners who cannot get traditional financing.

The 7a has an adjustable interest rate. The lender adjusts the percentage based on the movement of the prime rate. Also, you must put up collateral to secure this type of SBA loan.

Lenders usually increase the fees on a 7a loan as the size of the loan increases. However, the 7a is flexible and works for nearly any situation where you need working capital.

The Details Behind an SBA 504 Loan

An SBA 504 loan is primarily for commercial real estate financing on an owner-occupied property. You could also use a 504 loan for large equipment and major fixed assets that you’ll use in business operations.

The lender requires a minimal down payment, but the borrower does not have to provide any collateral. Additionally, these loans have a fixed interest rate. The fees are also a flat percentage of the loan amount.

When a 7a Loan Is the Better Option

A 7a loan offers more flexibility with the cash than the 504. For example, you can purchase a property or large equipment and still have access to capital for other items. For this reason, SBA-approved lenders tend to offer the 7a more frequently.

When You Should Opt for a 504 Loan

If you only need cash for large equipment or real estate, a 504 loan can save you substantial fees. You won’t have the expenses of a 7a loan, but remember that you can’t use the money for another business purchase.

Also, a 504 may be a fairer loan if your business is a partnership. A 7a loan requires outside collateral. If one partner has more private property than the other, the 7a loan could harm the more asset-rich partner if the business defaults. The 504 prevents this complication.

An SBA loan can be the ideal answer to your business financing needs, whether you’re trying to purchase large equipment and property or simply need working capital. Talk to a professional who can help you decide whether the 7a or 504 loan better suits your circumstances.