SBA 7(a) vs 504 vs Bank Term Loan: Cheaper for Equipment or Property?
Quick answer
For a building or long-lived equipment with 10% down, the SBA 504 is usually cheapest: on a $1,000,000 property it costs about $6,576 a month versus $7,751 for a 7(a) at 9.0% over 25 years. A bank loan is close ($6,390) but wants 25% down and reprices in five years. For working capital, a business purchase or a mixed request, 7(a) is the only SBA option, and it beats a bank term loan whenever you need 10 years or cannot fund 20% down.
The three products in one table
| SBA 7(a) | SBA 504 | Bank term loan | |
|---|---|---|---|
| Eligible uses | Working capital, equipment, real estate, acquisitions, refinancing | Fixed assets only: land, buildings, equipment with a 10+ year life | Anything the bank will underwrite |
| Maximum | $5,000,000 | $5,000,000 debenture ($5,500,000 manufacturers and energy) plus the bank lien | Bank policy |
| Structure | One loan, 75% SBA-guaranteed above $150,000 | 50% bank first lien + 40% CDC debenture + 10% equity | One loan, no guarantee |
| Rate (2026) | Market rate under a cap: prime + 3.0% (9.75%) above $350,000 | Bank portion negotiated; debenture fixed for the term, recently low-to-mid 6% | Prime + 1% to 3% for strong files |
| Term | 25 years real estate, 10 years everything else | 10, 20 or 25 years | 5 to 7 years equipment; 20 to 25 year amortization, 5-year reset, on real estate |
| Down payment | Often 10%; 10% minimum for startups and full buyouts under SOP 50 10 8 | 10% (15% for startups or single-purpose buildings, 20% for both) | 20% to 25% |
| Upfront fees | Guaranty fee 2% to 3.5% of the guaranteed portion (FY2026) | Roughly 2.5% of the debenture, financed | 0.5% to 1% origination |
| Prepayment penalty | 5% / 3% / 1% in years 1 to 3, only on 15+ year terms | Declining over the debenture's first 10 years | Often none on variable, 1% to 3% on fixed |
504 is the cheapest SBA money, but only for real estate and heavy equipment, in a two-lender structure that closes slowly. 7(a) is the flexible product with the higher rate. A bank term loan skips SBA fees but asks for more equity and a shorter term.
Equipment: $400,000, three ways
The worked example on the SBA loan calculator page is a shop borrowing $400,000 for equipment over 10 years, variable at 9.5% (the cap above $350,000 is prime + 3.0%, or 9.75% at today's 6.75% prime). The SBA guarantees 75%, so the FY2026 fee is 3% of $300,000, or $9,000, financed for a funded loan of $409,000. Payment: $5,292 a month. Lifetime cost: $235,083.
Here is the same $400,000 financed the other two ways. For the 504, assume the bank first lien at 8.5% and a 10-year debenture at 6.25% (fees of about 2.5% are financed, so $160,000 funds as roughly $164,000). For the bank loan, assume 20% down and 7 years at 8.5%.
| 7(a), 100% financed | 504 | Bank equipment loan | |
|---|---|---|---|
| Cash at closing | $0 | $40,000 (10%) | $80,000 (20%) |
| Amount financed | $409,000 (incl. $9,000 fee) | $200,000 bank + $164,000 debenture | $320,000 |
| Term | 10 years | 10 years | 7 years |
| Monthly payment | $5,292 | $4,321 ($2,480 + $1,841) | $5,068 |
| Annual debt service | $63,508 | $51,853 | $60,812 |
| Lifetime interest and fees | $235,083 | about $158,500 | about $105,700 |
The 504 payment is $971 a month lower than the 7(a): $11,650 a year of DSCR headroom. On the calculator's example business (net profit $95,000, add-backs $30,000, existing debt $18,000 a year), the 7(a) scores 1.53x; the 504 scores 1.79x.
The bank loan has the lowest lifetime cost only because it is shortest and carries the most equity. Prepay the 7(a) at $6,685 a month (a 7-year pace; no SBA penalty on 10-year loans) and the debt payoff planner shows about $73,600 of interest saved. Put 10% down instead of zero and the loan drops to $360,000, the fee to $8,100, the payment to $4,763. The 7(a) is expensive because of the rate, not the fee: every point off a $400,000, 10-year loan saves roughly $26,500.
Real estate: $1,000,000 building, three ways
Assume an owner-occupied building (51% occupancy minimum, 60% for new construction) and a strong borrower.
- 7(a): 10% down, $900,000 loan, 25 years at 9.0% (below the 9.75% cap). Guaranty fee is 3.5% of the 75% guaranteed portion, $23,625, financed. Payment $7,751 a month.
- 504: 10% down. Bank first lien of $500,000 at 8.0% over 25 years, $3,859 a month. CDC debenture of $400,000, which funds at about $410,000 with fees, fixed at 6.3% for 25 years, $2,717 a month. Total $6,576.
- Bank conventional: 25% down, $750,000 at 8.25%, 20-year amortization, 5-year rate reset. Payment $6,390.
| 7(a) | 504 | Bank conventional | |
|---|---|---|---|
| Cash at closing | $100,000 | $100,000 | $250,000 |
| Monthly payment | $7,751 | $6,576 | $6,390 |
| Annual debt service | $93,012 | $78,917 | $76,686 |
| Rate certainty | Variable, resets with prime | 40% fixed for 25 years, 50% per bank | Fixed 5 years, then repriced |
| Lifetime interest and fees | about $1,425,000 | about $1,073,000 | about $784,000 (if the reset rate never changes) |
The 504 saves $14,095 a year against the 7(a) with the same $100,000 down and fixes 40% of the project for 25 years. The bank loan's lower payment costs $150,000 more at closing; at 7% that cash grows to about $814,000 over 25 years in the compound interest calculator, more than the payment difference is worth.
The 7(a) wins on real estate only when the purchase is bundled with working capital or an acquisition (504 funds neither). It also carries the prepayment sting: 5% of any prepayment of 25% or more in year one, about $45,700 on the $900,000 loan if you refinance after 12 months.
When 7(a) is the right answer anyway
7(a) wins on flexibility rather than price. Four requests only it can fund:
- Working capital and inventory. 504 and most bank term loans exclude it. Under $50,000 the 7(a) cap is prime + 6.5% (13.25%), so small working-capital loans compete with a line of credit.
- Buying a business. Goodwill and non-competes are 7(a) uses; 504 funds only hard assets. SOP 50 10 8 (June 2025) requires a 10% equity injection on a full change of ownership.
- Mixed projects. A $600,000 building plus $200,000 of improvements plus $100,000 of working capital is one 7(a) loan or three loans.
- Refinancing business debt. Eligible under 7(a) when the new loan improves cash flow; 504 refinancing is limited to fixed-asset debt.
If any of those apply, stop comparing and run your own numbers in the SBA loan calculator: it computes the FY2026 guaranty fee, flags any rate above the cap for your loan size, and grades your DSCR against the 1.15x SBA floor and the 1.25x most lenders require.
The decision in four questions
- Is it a building or 10-year-life equipment (13 CFR 120.870), and can you put 10% down? Price a 504 first. Under 13 CFR 120.861 the project must also create or retain roughly one job per $90,000 of debenture or meet a public-policy goal (veteran-, women- or minority-owned, rural, energy reduction); most owner-occupied purchases qualify.
- Does the request include working capital, goodwill or refinancing? 7(a), structured as one loan.
- Can you fund 20% to 25% down and carry a 7-year term at 1.25x DSCR? Get a bank quote alongside the SBA quotes. It skips the guaranty fee and closes in 2 to 4 weeks, against 30 to 45 days for a PLP-bank 7(a) and 60 to 90 days for a 504, which must wait for the monthly debenture sale.
- Is the loan over $350,000? The 7(a) cap drops to prime + 3.0% there; below $350,000 the cap is prime + 4.5% to 6.5% and a 504 or bank loan will usually undercut it.
Every lender underwrites the same ratio: cash flow available for debt service divided by all annual payments. Before requesting term sheets, run your own numbers in the SBA loan calculator for the payment, the DSCR verdict and the Lever Board of changes that improve it.
FAQ
Q: Is an SBA 504 loan cheaper than a 7(a) loan?
For real estate and long-lived equipment, almost always. On a $1,000,000 building with 10% down, the 504 costs about $6,576 a month versus $7,751 for a 7(a) at 9.0%, $14,095 a year less, with 40% fixed for 25 years. The 504 cannot fund working capital, goodwill or most refinancing.
Q: What is the maximum SBA 7(a) rate on a loan over $350,000 in 2026?
WSJ prime plus 3.0% for variable-rate loans, or 9.75% at the 6.75% prime in effect on September 1, 2026. Fixed-rate loans above $250,000 cap at prime plus 5.0%, or 11.75%. Lenders may price below the cap, and strong files often close at prime plus 2.0% to 2.75%.
Q: How much down payment does each loan need?
A 504 requires 10% borrower equity, 15% for a startup or a single-purpose building, and 20% if both apply. A 7(a) commonly closes with 10% down, which is also the minimum equity injection for startups and full ownership changes under SOP 50 10 8. Conventional bank loans typically want 20% on equipment and 25% on commercial real estate.
Q: Can I use a 504 loan to buy equipment?
Yes, if it has a useful life of at least 10 years under 13 CFR 120.870: manufacturing machinery, medical imaging, commercial kitchen lines. The debenture term is 10 years for equipment, and in the $400,000 example the payment is $4,321 a month versus $5,292 on a 100%-financed 7(a).
Q: Is there a prepayment penalty on a 504 loan?
Yes, on the debenture: a 25-year debenture carries a penalty for its first 10 years, starting near the debenture rate as a percentage of the balance and falling to zero by year 11. The bank first lien carries whatever the bank negotiates. A 7(a) real-estate loan charges 5%, 3% and 1% in years one to three only if you prepay 25% or more of the balance.