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SBA 504 vs. 7(a) Loan Comparison: What Are the Differences?

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SBA 504 loans and SBA 7(a) loans are both types of business loans that are guaranteed by the U.S. Small Business Administration (SBA). The loan amounts, terms, and permissible uses vary for each of these programs. You’re more likely to use an SBA 7(a) loan for working capital or business expansion, and an SBA 504 loan to finance the purchase or improvement of commercial property or equipment.

SBA 504 loans vs. SBA 7(a) loans: Key differences

SBA 504 Loan

SBA 7(a) Loan

Loan Amounts

$50,000 to $5 million, $5.5 million for small manufacturers or specific energy projects

$5,000 to $5 million

Permissible Uses

• Construction

• Working capital

• Purchasing property

• Starting or expanding a business

• Property improvements

• Business acquisitions

• Equipment finance

• Equipment finance

• Debt refinance

• Debt refinance

Maximum Repayment Term

10, 20, or 25 years

• 10 years for working capital and equipment

•25 years for real estate

Interest Rate

• Approximately 4% to 7%

• Prime Rate + 2.25% to Prime Rate + 4.75%

• Fixed interest rate

• Variable interest rate

SBA guarantee fee, CDC fees, and bank fees

SBA guarantee fee and bank fees

Down Payment

10% (higher for startups or special use properties)

10% to 20%

Collateral

• The assets being financed serve as collateral

• Collateral required for loans over $25,000, personal residence might need to be pledged

• Personal guarantee required

• Personal guarantee required

Eligibility

• Have a business net worth of $15 million or less, and an average net income of $5 million or less

• Meet the SBA’s definition of “small”

• Be a for-profit business in the U.S. or U.S. territories

• Be a for-profit business in the U.S. or U.S. territories

• Provide a 10% down payment (more for startups or special use properties)

• Invested own money in the business

• Meet job creation/retention or public policy goals

• Attempted to use alternative financial resources

While there are some grey areas, it’s usually quite clear which loan—the SBA 504 or the 7(a)—is right for a small business. Keep reading to dig further into the differences between an SBA 504 vs. 7(a) loan to find out which one to choose for your business.

SBA 7(a) loan: Best for general business financing

For most small business owners who are trying to select among the different types of SBA loans, the 7(a) loan is the best option. The SBA 7(a) loan is a flexible, low-interest-rate business loan that’s suitable for a variety of business needs.

SBA 7(a) loan structure

The SBA itself is not in the business of lending. Rather, the SBA partially guarantees business loans made by banks and other private SBA lenders. The partial guarantee lowers a lender’s risk of extending capital to small business owners and incentivizes lenders to approve applicants that they might otherwise reject. A bank or other direct lender will underwrite and issue your SBA 7(a) loan.

SBA 7(a) loan uses

Along with the above uses, any of the following are also eligible uses for an SBA 7(a) loan:

  • Purchasing, constructing or renovating a commercial property (most investment property is excluded, however)

  • Acquiring fixed assets, such as equipment, fixtures, or furniture

  • Working capital, such as purchasing inventory or supplies

  • Purchasing land for a business

SBA 7(a) loan eligibility

The bank issuing the 7 (a) loans has the discretion to set its own eligibility criteria. In most cases, SBA lenders require a strong personal credit score (650+) and a demonstration of your ability to repay the loan, evidenced by historical business revenue or documented cash flow projections. They’ll also require a down payment of 10% to 20%.

SBA 7(a) loan amounts and terms

There’s technically no minimum loan amount set by the SBA, but obtaining loan amounts at the very low end of this spectrum can be hard because lenders don’t earn much profit from small loans.

The repayment time frame depends on what you’ll use the loan funds for. If you’re using an SBA loan for working capital, then the term is up to 10 years. Working capital encompasses uses like business expansion and buying inventory. A 10-year term also applies to equipment and machinery, but the term can’t exceed the expected useful life of the tool that’s being financed. If you’ll be using a 7(a) loan to purchase, construct, or make improvements to real estate, you’ll enjoy up to 25 years to repay your loan.

SBA 7(a) loan interest rates and fees

The typical SBA 7(a) loan has a variable interest rate and monthly payments of principal and interest. The latest SBA loan rates always represent a spread over the Prime Rate, which is a market rate that fluctuates based on how the economy is doing. SBA 7(a) loan rates are similar to the rates on conventional bank loans and represent some of the most affordable options for small businesses. That said, since the interest rate is variable, rates can go up or down while your loan is outstanding.

The primary fee on an SBA 7(a) loan is the SBA guarantee fee. The SBA charges the guarantee fee to ensure that the government has money to reimburse the lender if the business can’t pay back the loan.

Currently, the SBA guarantee fee is as follows:

  • Loans of $150,000 or less: 2% fee on the guaranteed portion

  • Loans of $150,001 to $700,000: 3% fee on the guaranteed portion

  • Loans of $700,001 to $5 million: 3.5% fee on the guaranteed portion on amounts up to $1 million, plus 3.75% fee on the guaranteed portion over $1 million.

Note that this fee is charged on the guaranteed portion of the loan. For example, if you get a $150,000 loan, the SBA will guarantee up to 85% of that loan—or $127,500. That means you’ll owe a guarantee fee of 2% on that latter amount—or $2,550. There’s also a small service fee that you have to pay annually.

Keep in mind that your bank will likely charge additional fees, such as loan packaging fees and closing fees. Such fees will increase your overall borrowing cost.

SBA 7(a) loan collateral

Most SBA 7(a) loans require collateral of some sort. For larger loans, the SBA requires the lender to place a lien on all assets that are financed with the loan, as well as any existing fixed assets of the business.

If the loan isn’t fully secured at that point, the bank might also place a lien on the business owner’s personal residence or other personal property.

In addition to collateral, anyone who owns 20% or more of the business must sign a personal guarantee. By signing a personal guarantee, you are making a personal promise to pay back the loan if your business’s assets don’t sufficiently compensate the lender.

SBA 504 loan: Best for financing fixed business assets

The SBA 504 loan, more formally called an SBA 504/CDC loan, is a more specialized loan than the 7(a) loan. The 504 loan is designed for business owners who need to finance the acquisition or improvement of fixed assets—such as land, buildings, or equipment—and whose projects promote economic development or other public policy goals.

SBA 504 loan structure

The SBA 504 loan has a more complicated structure than the SBA 7(a) loan, comprising three parts:

  • Bank loan (50%): A bank or other direct lender extends 50% of the loan amount

  • CDC loan (40%): An SBA-approved Certified Development Company (CDC) extends 40% of the loan amount

  • Borrower down payment (10%): The borrower puts up 10% of the loan as a down payment

Owners of startups and special use properties must put up higher down payments. CDCs are local nonprofit lenders that promote economic development in their communities by participating in SBA 504 financing. The SBA certifies and regulates CDCs.

SBA 504 loan uses

The funds from a 504 loan can only be used for properties that are at least 51% owner-occupied (for existing facilities; 60% for new construction). In other words, if your building has 1,000 square feet, your business must occupy and use at least 510 square feet. You can lease out the remaining space to other businesses. In contrast to an SBA 7(a) loan, an SBA 504 loan cannot be used for working capital or for buying inventory or supplies.

SBA 504 loan eligibility

The job creation/retention or public policy requirement is unique to the SBA 504 loan program. For every $75,000 that the CDC lends, the applicant business must create or retain at least one job (small manufacturers have to meet a higher job creation/retention goal). Three-quarters of the jobs created or retained must be in the local community. If you’re not able to show that you meet the job creation or retention requirements, there are other public policy goals that you can meet instead, such as furthering the growth of minority or women-owned businesses or reducing energy consumption.

The typical business owner has to put just 10% down on an SBA 504 loan. However, if you have a startup (fewer than two years of consecutive operating history) or a special use property (such as an amusement park or gas station), you’ll have to put down 15%. If your business is classified as a startup and a special use property, the down payment increases to 20%.

On top of the requirements detailed above, the bank and the CDC issuing the loan can set additional requirements. As with 7(a) loans, SBA 504 lenders require strong personal credit and a demonstration of your ability to repay the loan, evidenced by historical business revenue or documented cash flow projections.

SBA 504 loan amounts and terms

The SBA 504 loan is ideal for large business investments. There’s no limit on the bank portion of the loan, so 504 loans technically have been funded for upward of $20 million.

Your repayment term on an SBA 504 loan will be 10, 20, or 25 years. If financing equipment, the term depends on the expected useful life of the equipment. The term will be 20 or 25 years for other uses, so you can expect low monthly payments.

SBA 504 loan interest rates and fees

Whereas the SBA 7(a) loan is a variable-rate loan, SBA 504 loans are fixed-rate loans. The advantage of fixed-rate financing is that your rate is locked in for the life of the loan. This is one of the biggest benefits that the SBA touts for 504 loans.

SBA 504 loan rates are among the lowest interest rates you can find on small business financing, even lower than SBA 7(a) loans. The interest rates on SBA 504 loans are pegged to the rates on U.S. Treasury bonds.

There are a few more fees on SBA 504 loans compared to 7(a) loans. SBA 504 loans come with four main fees:

  • SBA upfront guarantee fee – The SBA charges a 0.5% upfront fee to the borrower.

  • SBA annual service fee – The SBA charges an annual service fee of 0.368% to the borrower, which is applied to the loan’s outstanding principal balance.

  • CDC processing fee – The CDC charges a 1.5% upfront processing fee to the borrower.

  • CDC servicing fee – The CDC also charges an annual servicing fee between 0.625% and 2% per year, assessed on the loan’s outstanding principal balance.

Keep in mind that the CDC or bank can charge additional fees, such as loan underwriting fees and closing fees. These fees will increase your overall borrowing cost.

SBA 504 loan collateral

Most SBA 504 loans are self-secured, meaning that the underlying fixed assets serve as collateral. There’s typically no need to provide additional collateral above and beyond what you’re already acquiring with the funds.

Anyone who owns 20% or more of the business must sign a personal guarantee on both the CDC and bank portion of the 504 loan. Remember, even business owners with a solid credit history and excellent financials will have to sign a personal guarantee for the lender’s security. If your business defaults and cannot compensate the lender, the personal guarantee permits the lender to pursue loan repayment directly from the business owner’s personal assets.

SBA 504 vs. 7(a) comparison: Which loan is right for you?

Choose the SBA 7(a) loan if:

  • You need working capital to buy inventory, supplies, or fill cash flow gaps

  • You need less than $5 million in financing

  • You prefer a faster SBA loan application process

The SBA 7(a) loan program also has sub-programs that might be suitable for your business, such as Community Advantage Loans designed for women, minorities, and other underserved entrepreneurs. To get started with an SBA 7(a) loan, apply here.

Choose the SBA 504 loan if:

  • You need financing to purchase, lease, renovate, or improve commercial real estate, buildings, or equipment.

  • You’re making a large investment in your business.

  • You’re able to show that you meet job creation, job retention, or public policy goals.

  • You’re okay with a slower loan application process.

  • You can only afford a 10% down payment.

To get started with an SBA 504 loan, use the SBA’s Lender Match tool. This can help you find a bank and a CDC that participate in SBA 504 financing.

The bottom line

When you are considering a small business loan, there are several options to choose from. The SBA 7(a) loan fits a wide variety of business needs and is an especially good option if you are looking for working capital. The SBA 504 loan is more niche and designed for real estate investments and other fixed assets. Whichever you end up choosing, both the SBA 504 loan and 7(a) loan are excellent opportunities for small business owners searching for affordable financing.

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Banking

Overdraft Protection: What It Is and Different Types

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Overdraft fees can be a major drain on your finances. Some banks charge more than $30 per overdraft and potentially charge that fee multiple times per day if you keep making transactions that overdraw your checking account. If you want to avoid these fees, you can typically opt out of overdraft coverage with your bank. It can be useful, however, to set up overdraft protection instead of opting out so you don’t find yourself unable to pay for something urgent.

What is overdraft protection?

Overdraft protection is a checking account feature that some banks offer as a way to avoid overdraft fees. There are several types of overdraft protection, including overdraft protection transfers, overdraft lines of credit and grace periods to bring your account out of a negative balance. Some other overdraft coverage programs might be a combination of these features.

Before you opt out of overdraft protection altogether — which means your bank will decline any transaction that would result in an overdraft — consider how you might need overdraft coverage in an emergency. For example, maybe you’re using your debit card to pay for gas on a road trip. You need enough fuel to get home but don’t have enough money in your checking account. Instead of dealing with running out of gas, you may want to deal with an overdraft.

How does overdraft protection work?

Here are more details about the main types of overdraft protection that banks tend to provide.

Overdraft protection transfers. When a bank allows you to make an overdraft protection transfer, you can link a savings account, money market account or a second checking account at the same bank to your main checking account. If you overdraft your checking, your bank will take the overdrawn funds from your linked account to cover the cost of the transaction. Many banks allow this service for free, but some banks charge a fee.

Overdraft lines of credit. An overdraft line of credit functions like a credit card — but without the card. If you don’t have enough money in your account to cover a transaction, your bank will tap your overdraft line of credit to cover the remainder of the transaction. Lines of credit often come with steep annual interest rates that are broken up into smaller interest charges that you keep paying until the overdraft is paid back. Be aware that a line of credit could end up being expensive if you use this option to cover your overdrafts.

Grace periods. Some banks offer grace periods, so instead of immediately charging an overdraft fee, the bank will give you some time — typically a day or two — to return to a positive account balance after overdrafting. If you don’t do so within that time frame, your bank will charge you fees on any transactions that overdrafted your account.

Other coverage programs. Some banks are taking a new approach to overdraft protection by offering what’s basically a free line of credit with a longer grace period for customers to bring their account to a positive balance. One example, Chime’s SpotMe® program, allows customers to overdraft up to $200 with no fees. The customer’s next deposit is applied to their negative balance, and once the negative balance is repaid, customers can give Chime an optional tip to help keep the service “free.”

Chime says: “Chime is a financial technology company, not a bank. Banking services provided by, and debit card issued by, The Bancorp Bank or Stride Bank, N.A.; Members FDIC. Eligibility requirements and overdraft limits apply. SpotMe won’t cover non-debit card purchases, including ATM withdrawals, ACH transfers, Pay Friends transfers or Chime Checkbook transactions.”

4 ways to avoid overdraft fees

  1. Set up low balance alerts. Many banks offer an alert option so you’ll get a text, email or push notification if your account drops below a certain threshold. These alerts can help you be more mindful about your balance so that you can put more money into your account or spend less to avoid an overdraft.

  2. Opt out of overdraft coverage. If your bank doesn’t offer overdraft protection — or if its only options cost money — you may want to opt out of overdraft coverage, in which case your bank will decline any transactions that would bring your account into the negative. Keep in mind that this option could put you in a sticky situation if you’re in an emergency and can’t make an important purchase because you don’t have overdraft coverage.

  3. Look for a bank that has a more generous overdraft policy. Many banks are reducing or eliminating their overdraft fees, so if overdrafts are an issue for you, do some comparison shopping to see if there are better options available.

  4. Consider getting a prepaid debit card. Prepaid debit cards are similar to gift cards in that you can put a set amount of money on the card, and once you run out, you can load it with more money. The prepaid debit card can’t be overdrawn because there isn’t any additional money to draw from once its balance has been spent.

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Business Ideas

Startup Business Grants: Best Options and Alternative Funding Sources

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Startup business grants can help small businesses grow without debt. But if you want free money to start a company, your time may be better spent elsewhere. Competition for small-business grants is fierce, and many awards require time in business — often at least six months.

Some grants are open to newer businesses or true startups. And even if you don’t qualify now, it can pay to know where to look for future funding. Here are the best grants for small-business startups, plus alternative sources of startup funding to consider.

How Much Do You Need?

with Fundera by NerdWallet

Government startup business grants and resources

Some government programs offer direct funding to startups looking for business grants, but those that don’t may point you in the right direction or help with applications:

Grants.gov. Government agencies routinely post new grant opportunities on this centralized database. If you see an opportunity relevant to your business idea, you can check if startups are eligible. Many of these grants deal with scientific or pharmaceutical research, though, so they may not be relevant to Main Street businesses.

Local governments. Lots of federal grants award funding to other governments, like states or cities, or to nonprofit economic development organizations. Those entities then offer grants to local businesses. Plugging into your local startup ecosystem can help you stay on top of these opportunities.

Small Business Development Centers. These resource centers funded by the Small Business Administration offer business coaching, education, technical support and networking opportunities. They may also be able to help you apply for small-business grants, develop a business plan and level up your business in other ways.

Minority Business Development Agency Centers. The MBDA, which is part of the U.S. Department of Commerce, operates small-business support centers similar to SBDCs. The MBDA doesn’t give grants to businesses directly, but these centers can connect you with grant organizations, help you prepare applications and secure other types of business financing.

Local startup business grants

Some local business incubators or accelerators offer business grants or pitch competitions with cash prizes. To find these institutions near you, do an online search for “Your City business incubator.”

Even if you don’t see a grant program, sign up for their email newsletter or follow them on social media. Like SBDCs and MBDAs, business incubators often provide business coaching, courses and lectures that can help you develop your business idea.

Startup business grants from companies and nonprofits

Lots of corporations and large nonprofits, like the U.S. Chamber of Commerce, organize grant competitions. Some national opportunities include:

iFundWomen. iFundWomen partners with other corporations to administer business grants. You can fill out a universal application to receive automatic notifications when you’re eligible to apply for a grant.

Amber Grant for Women. WomensNet gives two $10,000 Amber Grants each month and two $25,000 grants annually. Filling out one application makes you eligible for all Amber Grants. To qualify, businesses must be at lesat 50% women-owned and based in the U.S. or Canada.

National Association for the Self-Employed. Join NASE, and you can apply for quarterly Growth Grant opportunities. There are no time-in-business requirements for these grants of up to $4,000, but you’ll need to provide details about how you plan to use the grant and how it will help your business grow.

FedEx Small Business Grant Contest. This annual competition awards grants to small-business owners in a variety of industries. You can sign up to receive an email when each application period opens. To be eligible, you’ll need to have been selling your product or service for at least six months. Be mindful, though, that each grant cycle receives thousands of applications.

Fast Break for Small Business. This grant program is funded by LegalZoom, the NBA, WNBA and NBA G League and administered by Accion Opportunity Fund. You can win a $10,000 business grant plus free LegalZoom services. Applications open during the NBA season, which runs from fall to early summer each year.

Alternative funding sources for startups

New businesses likely won’t be able to rely on startup business grants for working capital. The following financing sources may help accelerate your growth or get your startup off the ground:

SBA microloans

SBA microloans offer up to $50,000 to help your business launch or expand. The average microloan is around $13,000, according to the SBA.

The SBA issues microloans through intermediary lenders, usually nonprofit financial institutions and economic development organizations, all of which have different requirements. You can use the SBA’s website to find a lender in your state.

Friends and family

Asking friends and family to invest in your business may seem daunting, but it’s very common. Make sure you define whether each person’s money is a loan and, if so, when and how you’ll pay it back. Put an agreement in writing if possible.

Business credit cards

Business credit cards can help you manage startup expenses while your cash flow is still unsteady. You can qualify for a business credit card with your personal credit score and some general information about your business, like your business name and industry.

You’ll probably need to sign a personal guarantee, though, which is a promise that you’ll pay back the debt if your business can’t.

Crowdfunding

If your business has a dedicated customer base, they can help fund you via crowdfunding. Usually businesses offer something in exchange, like debt notes, equity shares or access to an exclusive event.

There are lots of different crowdfunding platforms that offer different terms, so look around to find the model that works best for you.

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Finance & Accounting

Why Is Crypto Down?

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For crypto investors, any given day can feel like a roller coaster ride. The price of Bitcoin, for instance, regularly goes up or down by more than 5% in a day. In contrast, stock indices like the S&P 500 or Dow Jones Industrial Average rarely see swings that large.

During a bad turn for digital assets, it’s natural to wonder what caused the price drop — and what you can learn from it. Of course, each day on the market may bring a different answer for why crypto is down (or up), but understanding the basic mechanics behind crypto’s volatility can help you make better decisions.

Here are some of the many possible reasons behind big drops in prices:

  • Low liquidity. If a cryptocurrency is trading at lower-than-usual volumes, weird things can happen, like a single large trade throwing off the market by swinging prices closer to the value of that transaction.

  • Speculative trading dries up. High-risk trading with hopes of quick returns can end badly when momentum wanes.

  • Loss of trust. Trust in a product is a price driver. If it evaporates, prices can, too. In addition, because crypto is a novel asset class based on relatively new technology, signs of trouble such as cyberattacks or product failures can adversely affect the overall market.

Whatever the reason behind the crypto price trends of a single day, it’s important to remember that volatility has been a defining part of crypto investing.

Even Bitcoin.org, the website started by Satoshi Nakamoto to help explain Bitcoin, doesn’t shy away from that fact when it states: “relatively small events, trades, or business activities can significantly affect the price.”

Making sense of the bigger picture

In addition to dropping a lot in one day, cryptocurrencies are vulnerable to macroeconomic factors that can push down values for weeks or months.

In November 2021, a price decline turned into a sustained nosedive that continued until midway through 2022, when prices stabilized far below their lofty former highs.

Crypto’s drop coincided with price declines in many asset classes, but the declines in crypto were far steeper. For example, the S&P 500 dropped around 25% but has clawed back about half of those losses. Meanwhile, Bitcoin is still worth less than half of what it was before Thanksgiving 2021.

When explaining crypto’s drop, sometimes called “crypto winter,” experts point to the same root cause: Investors were looking to offload risky assets of all types amid economic uncertainty.

Adam Grealish, director of investment solutions and GM of advisory at Altruist, a software platform for financial advisors, said the scale of these big declines in crypto prices undercuts “the story about it being digital gold and a place where folks are moving to protect wealth.”

“While there’s an interesting theoretical argument for it, empirically it trades much more like a risky, high-volatility asset,” Grealish said.

The macroeconomic environment in 2022 hasn’t been kind to risky assets.

Red-hot inflation has driven prices up. In response, the Federal Reserve raised rates, which lifted the interest charged for all types of loans. When money is more expensive, stocks and other assets can suffer. As a result, investors tend to flee riskier investments, including crypto.

While this is bad news for investors and customers alike, Greg King, founder and CEO of crypto investment firm Osprey Funds, says this is part of an evolutionary process that will improve the industry in the long run.

“Our view is that it’s a positive in cleaning out some of the dead wood there,” he says. “All of the companies that went under that were in the press were centralized operations with poor risk management.”

It’s impossible to know what course the crypto market could take from here.

If interest in cryptocurrency investing recovers to the levels seen in 2021, that could benefit people willing to weather the tough times. But don’t confuse a volatile asset for a basketball; only with the latter can you expect a bounce back because it fell. Volatility means that prices could still go in either direction.

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