3 Types of SBA Loans for the Construction Industry

7(a) Loans

7(a) loans are the primary SBA-guaranteed loans, available through many lenders and with a maximum amount of $5 million. 7(a) loans are the easiest and most common SBA loans to acquire and can be used for many business expenses, including real estate, buildings, working capital, refinancing, machinery, equipment, and even changes of ownership. To be eligible, a business must be a for-profit business in operation in the U.S., be considered small by SBA standards, not be an ineligible business type, and be creditworthy. These loans have a variety of terms and can be fixed-rate or variable-rate, depending on the lender. But what if a construction business needs longer terms?

504 Loans

504 loans are long-term, fixed-rate loans borrowed to finance major fixed assets that specifically promote growth and job creation. These special loans are administered by Certified Development Companies, and the maximum amount is $5.5 million. These loans can be used for existing buildings and land, new facilities, long-term machinery or equipment that have a minimum life of 10 years, and improvements and modernization of land, streets, et cetera. One very important difference between 7(a) loans and 504 loans is that 504 loans cannot be used for working capital. The business must be for-profit, located in the U.S. or one of its possessions, have a tangible net worth of less than $15 million, and have an average net income of less than $5 million after federal income taxes for two years before applying. While 504 loans are generally for very large purchases, what if a construction business needs to take out a much smaller loan?

Microloans

Microloans are generally smaller loans up to $50,000. These loans are specifically geared towards small businesses and some not-for-profit childcare centers, and the average microloan is around $13,000. These loans are administered by certain intermediary lenders that are nonprofit and community-based. Microloans can be used for a wide variety of purposes, but cannot be used to pay off existing debts or purchase real estate. These loans usually require collateral and a personal guarantee by the business owner.

The Bottom Line

What type of SBA loan is right for your construction business? If you’re looking for a loan that has a wide variety of applications and don’t mind shorter terms or less predictable rates, the 7(a) loan will generally be the best option. For large, substantial purchases of fixed assets, 504 loans are the best option due to their longer terms and fixed rates. Finally, microloans are perfect for smaller purchases if you’re able to qualify with your area intermediary lender. Business owners can rest easy knowing that there is always a possibility to get financing through the SBA loan program, although they should first check to make sure they can't get financing through a BlueTape partner first.