As you look to finance a real estate purchase, there are various choices available to best meet your needs. One option is a loan from the Small Business Administration (SBA).
There are two SBA loan types that can be used to buy real estate: SBA 7(a) loans and 504 loans. These loans, guaranteed by the SBA, offer large loan amounts, competitive interest rates and lengthy repayment terms. They can also be used to construct or renovate buildings, as well as to make improvements to land.
Before making a decision on how to finance your real estate purchase, understand what an SBA loan offers and whether or not it’s the best choice to help grow your business.
What Are SBA Real Estate Loans?
SBA real estate loans are small business loans guaranteed by the Small Business Administration. SBA loans include a variety of programs, including 7(a), 504 and microloans. Only 7(a) and 504 loans can be used to purchase real estate—microloans can not.
SBA 7(a) loans and 504 loans have similarities, including competitive interest rates, long repayment terms and maximum loan amounts around $5 million. However, they also have key differences in how the loans are structured and eligibility requirements for borrowers.
How SBA Loans for Real Estate Work
SBA loans for real estate provide funding to purchase real estate, construct new facilities, renovate existing buildings or improve land. For 7(a) real estate loans, the maximum loan term is 25 years, and for a 504 real estate loan, terms can extend up to 20 or 25 years.
Your actual term, however, will depend on the lender and your application, such as your business credentials. You can apply for a 7(a) loan through a participating bank or credit union, while 504 loan applications are available exclusively through eligible Certified Development Companies (CDCs). A list of CDCs is available on the SBA website.
Interest rates can also vary by lender. For 7(a) loans, your interest rate can be either fixed or variable and won’t exceed the SBA’s maximum rate in place at the time of borrowing.
For 504 loans, your interest rate is pegged to an increment above the current prime rate for 10-year issues from the U.S. Treasury. The rate will equal about 3% of your total principal and may be financed along with the loan.
Types of SBA Real Estate Loans
The SBA offers many different loans, but these are the two types that can be used for real estate: 7(a) loans and 504 loans.
SBA 7(a) loans
SBA 7(a) loans are available for up to $5 million with repayment terms as long as 25 years when you use them for real estate. You’ll apply for an SBA 7(a) through a participating lender, such as a bank or credit union.
The SBA backs these loans, guaranteeing 85% of the loan if it’s $150,000 or less. When the loan exceeds $150,000, the SBA guarantees 75% of the principal. In 2021, the average 7(a) loan amount was $704,581.
How you use an SBA 7(a) loan for real estate is flexible. You can use the loan to finance the purchase or lease of buildings or land, or you can use it on landscaping or building renovations and construction.
Besides using a 7(a) loan for real estate, you can also use this capital for equipment, inventory, working capital, and, in some circumstances, debt refinancing. If you use the loan for these other purposes, your maximum repayment term will be 10 years.
SBA 504 loans
SBA 504 loans, or CDC/504 loans, are available up to $5.5 million with repayment terms up to 20 or 25 years. For certain energy projects, you can borrow a 504 loan for up to three projects for a maximum amount of $16.5 million.
504 loans are designed to finance projects that will promote business growth or job creation. They have a 50/40/10 structure: 50% of the loan comes from a conventional lender, 40% comes from a CDC and 10% comes from the borrower in a down payment.
You can use an SBA 504 loan to purchase or make improvements to land or buildings. You can also use them on equipment or machinery, in which case the loan term will max out at 10 years. Unlike 7(a) loans, you can’t use a 504 loan for working capital or inventory.
How To Get an SBA Real Estate Loan
You can apply for an SBA 7(a) real estate loan with a participating lender, such as a bank or credit union. For an SBA 504 loan, you’ll apply through an eligible CDC.
The SBA provides a Lender Match tool that can connect you with a lender. The application process for an SBA loan can be extensive and requires comprehensive information and documentation about your business.
Requirements may include your personal and business tax returns, financial statements, licenses and real estate agreements. The process may also involve a real estate appraisal or environmental investigation.
Business owners pursuing 504 loans may also have to provide documentation demonstrating how their real estate project will promote business growth or job creation.
How To Qualify For SBA Real Estate Loans
The eligibility requirements for SBA 7(a) and 504 real estate loans vary, but both require that your business operates as a for-profit company in the U.S. or its territories (non-profit businesses are not eligible). You must invest reasonable owner equity, as well as use other financial resources before applying for a loan.
For a 504 loan, your business needs to have a net worth lower than $15 million and an average net income of less than $5 million after federal income taxes for the past two years. Other requirements include having qualified expertise as a manager, a strong business plan, good character and the ability to repay your loan.
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