SBA 504 vs. SBA 7(a) Loan Programs: Fixed Debenture Costs, CDC Fees & Equity Injection Hurdle

## Cost of Capital Discrepancies: SBA 504 vs. SBA 7(a)

Business owners acquiring owner-occupied commercial real estate must evaluate whether the 504 or 7(a) loan structure yields lower lifetime debt service and reduced prepayment friction.

### 1. Capital Structure Breakdown (SBA 504 50/40/10)

The SBA 504 program blends two separate debt instruments alongside owner equity:

1. **Bank Senior Note (50%)**: Conventional first mortgage originated by a commercial lender with independent term and rate.
2. **CDC Debenture (40%)**: Fully amortizing 20 or 25-year fixed note guaranteed 100% by the SBA, funded via monthly bond pooling.
3. **Borrower Equity (10%)**: Minimum cash equity injection (increases to 15% for single-purpose facilities or startup businesses).

$$\text{Blended Rate} = 0.50 \times R_{\text{Bank}} + 0.40 \times R_{\text{CDC}} + \text{Annual CDC Servicing Fees}$$

| Parameter | SBA 504 Program | SBA 7(a) Program |
|:----------|:----------------|:-----------------|
| Maximum Loan Amount | Up to $5.5M CDC ($12M+ total project) | $5,000,000 |
| Interest Rate Type | Fixed 20/25-year debenture | Variable (WSJ Prime + 1.5% to 3.0%) |
| Borrower Down Payment | 10% - 20% | 10% - 15% |
| Use of Proceeds | Real Estate & Heavy Machinery Only | Real Estate, Working Capital, Refinancing |
| Prepayment Penalty | Declining 10-year penalty on CDC note | 3-year declining penalty (5%, 3%, 1%) |