Bryant Searle

Bryant Searle

As Idaho manages through the COVID-19 pandemic, it’s important for small business owners to leverage the right tools and resources so they can thrive, not just survive.

Thanks to the U.S. Small Business Administration’s Paycheck Protection Program, thousands of businesses in the Gem State received funding to help keep their doors open and workers employed. But if you weren’t a candidate for a PPP loan, or you just need additional capital, other options are available.

Although the CARES Act made headlines for authorizing PPP loans, what’s less well known are the new benefits implemented for SBA 7(a) and 504 loans. According to Section 1112 of the CARES Act, the SBA will pay the principal, interest and any associated fees for 7(a) and 504 loans for a six-month period.

This is not a deferment — these are full payments intended to provide relief to borrowers during challenging times. This benefit was provided not only for existing loans, but also for new loans made and fully disbursed between March 27 and Sept. 27, 2020. If you’d like to take advantage of this attractive benefit, it’s important to choose the loan that’s best for your business.

SBA 7(a) versus 504 loans

The 7(a) loan is one of the SBA’s most popular loans because of its versatility. Up to $5 million can be borrowed for business acquisitions, expansions and startups. Funds can also be used for an owner-occupied real estate purchase, construction or improvements, tenant/leasehold improvements, debt refinance, inventory or working capital.

A 504 loan is used to purchase real estate, equipment or machinery, or to upgrade or remodel existing owner-occupied facilities. Maximum loan amounts range from $5 million to $5.5 million and a borrower typically provides 10 percent equity with the remainder split between a bank (50 percent) and a Certified Development Company (40 percent) backed by an SBA guarantee.

When would a 504 loan be a better fit?

If there are multiple borrowers with an uneven distribution in physical assets, an SBA 504 loan might be the preferred option. Unlike the 7(a) loan, an SBA 504 loan does not require a lien on a home or outside collateral.

Additionally, 7(a) fees often increase with the size of the project. For instance, there is a guarantee fee of 3.5 percent for loans over $700,000, but if the project exceeds $1 million, the fee jumps to 3.75 percent. In contrast, with a 504 loan, the fees as a percentage stay flat even when the loan amount rises.

It’s also important for a 504 borrower to be strong in the “5 C’s” of credit: character, capacity to repay, capital (the owner's cash or equity contribution), conditions (terms of the loan) and collateral. Because the bank’s portion of a 504 loan is a conventional loan and does not carry a government guarantee, lenders want to see borrowers with a strong business credit history and established revenues. It’s important to note that 504 and 7(a) loans are subject to credit approval.

When would a 7(a) loan be a better fit?

If you are purchasing a business combined with real estate, and you have a need for working capital, a 7(a) loan might be the best choice, as 504 loans cannot be used to finance working capital or purchase a business. Although it’s possible to use a 7(a) loan to purchase commercial real estate, this option is typically more expensive when SBA fees are considered.

This loan might also be the best choice if you are operating a startup or a business considered higher risk by the SBA, such as a restaurant. The SBA guarantee for 7(a) loans allows more early stage businesses to qualify.

It’s important to find an experienced banker who can help you evaluate your SBA loan options and move the process forward. Business owners who leverage capital wisely will give themselves a key advantage to get through the current recession.

Bryant Searle is Eastern Idaho retail lending manager for Zions Bank, a division of Zions Bancorporation, N.A. Member FDIC. Zions Bank is an Equal Housing Lender. To contact Searle, call 208-552-1341 or email