SBA Real Estate Loans: All the Information You Need to Know

There are several options available to best suit your needs when you look to finance a real estate acquisition. A Small Business Administration (SBA) loan is one choice.

Two SBA lending programs, the 504 loan and the 7(a) loan, can be utilized to purchase real estate. Large loan amounts, low interest rates, and protracted repayment durations are all features of these SBA-guaranteed loans. They can be used to build or remodel buildings, as well as to enhance the land.

What Are SBA Loans for Real Estate?

SBA real estate loans are loans for small businesses that are backed by the SBA. SBA loans are available through a number of programs, such as 7(a), 504, and microloans. Real estate purchases can only be made with 7(a) and 504 loans; microloans are not permitted.

Similarities between SBA 7(a) loans and 504 loans include low interest rates, lengthy repayment durations, and $5 million or less in maximum loan amounts. But there are also significant disparities in the way the loans are set up and what qualifies as a borrower.

The Process of SBA Real Estate Loans

SBA real estate loans offer money for the purchase of real estate, the building of new facilities, the renovation of existing structures, or the improvement of property. The maximum loan duration for 7(a) real estate loans is 25 years, whereas terms for 504 real estate loans can last up to 20 or 25 years.

The lender and your application, including your business qualifications, will determine your actual term. A participating bank or credit union can help you qualify for a 7(a) loan, but only eligible Certified Development Companies (CDCs) can help you apply for a 504 loan. The SBA website contains a list of CDCs.

Lenders may charge different interest rates. You can choose between a fixed or variable interest rate for 7(a) loans as long as it doesn’t go above the SBA’s maximum rate in effect at the time you take out the loan.

Your interest rate for 504 loans is set at a level above the prime rate that is currently applicable to U.S. Treasury 10-year issues. The rate could be financed simultaneously with the loan and equates to around 3% of your total debt.

Different SBA Real Estate Loan Types

The two loan categories that can be utilized for real estate are 7(a) loans and 504 loans, which the SBA offers in a variety of loan programs.

Lending through the SBA 7(a)

When used for real estate, SBA 7(a) loans are available for up to $5 million with 25-year repayment terms. A participating lender, such as a bank or credit union, is where you submit your SBA 7(a) application.

These loans are supported by the SBA, which also guarantees 85% of smaller loans of up to $150,000. The SBA guarantees 75% of the principal when the loan exceeds $150,000. The average 7(a) loan size in 2021 was $704,581.

• An SBA 7(a) loan for real estate can be used anyway you see fit. You can utilize the loan to pay for the purchase or rental of real estate, as well as for landscaping, building upgrades, and new construction.

• A 7(a) loan can be used for more than just real estate; it can also be used for working capital, inventory, equipment, and, in some cases, debt refinancing. Your maximum repayment period will be 10 years if you use the loan for these additional objectives.

Loans made through SBA 504

With periods of up to 20 or 25 years, SBA 504 loans, also known as CDC/504 loans, are available up to $5.5 million. You may obtain a 504 loan for as many as three energy-related projects totaling a maximum of $16.5 million.

504 loans are intended to fund initiatives that support business expansion or employment development. They have a 50/40/10 structure, where 50% of the loan is provided by a traditional lender, 40% by a CDC, and 10% is provided by the borrower as a down payment.

Purchasing land or making modifications to buildings are both possible with an SBA 504 loan. You may also use them to purchase machinery or equipment, in which case the loan’s maximum length is 10 years. A 504 loan cannot be used for inventory or working capital, unlike 7(a) loans.

How to Apply for an SBA Loan for Real Estate

An SBA 7(a) real estate loan application can be made with a participating lender, like a bank or credit union. You should apply for an SBA 504 loan through a CDC that is qualified.

• You can connect with a lender through the SBA’s Lender Match tool. The application procedure for an SBA loan might be laborious and necessitate substantial data and documentation regarding your company.

• You can be asked to submit your personal and business tax returns, financial statements, licenses, and real estate agreements. A real estate evaluation or environmental inquiry could also be part of the procedure.

The evidence that demonstrates how the real estate project would foster business expansion or employment creation may also be required of business owners applying for 504 loans.

How to Get SBA Loans for Real Estate

Both SBA 7(a) and 504 real estate loans must be operated as for-profit corporations in the United States or one of its territories in order for your business to be eligible. Non-profit organizations are not permitted. Before requesting a loan, you must make a reasonable owner equity investment and exhaust all other available funding alternatives.

Your company must have a net worth below $15 million and average net income below $5 million over the previous two years to qualify for a 504 loan. A sound company strategy, a good character, and the ability to repay your loan are other prerequisites. Qualified managerial experience is another.

Understand what an SBA loan offers and whether it’s the best option to help your business expand before deciding how to fund your real estate transaction.