If you are looking to purchase commercial real estate, a loan from the Small Business Administration (SBA) is an option you should consider. In this blog post, we talk about SBA loans, their benefits as it relates to commercial real estate, plus other useful facts and tools to help you get started.
What Are SBA Loans?
SBA loans are loans partially guaranteed by the Small Business Administration (SBA), a government agency whose stated goal is to help Americans plan, start, and grow their business.
One of the key aspects to keep in mind when it comes to understanding SBA loans is that the SBA itself doesn’t lend money; it only offers a government guarantee.
The proceeds from an SBA loan come from a lending institution such as a bank. However, the key difference between SBA loans and your typical bank loan is that, since they are partially guaranteed by the U.S. government, SBA loans tend to feature friendlier terms and lower rates.
SBA loans can be used for a variety of purposes, including getting working capital, buying equipment, consolidating debt, or (here’s where it gets interesting for us) purchasing commercial real estate.
SBA Loans for Commercial Real Estate
If you are interested in taking out an SBA loan for commercial real estate, you’ll have two basic alternatives: 504 loans and 7(a) loans.
Let’s take a closer look at the differences between these two SBA loan programs so you can decide which one makes sense for you.
504 Loans and Commercial Real Estate
504 loans are SBA loans designed to help business owners purchase major fixed assets such as heavy machinery or real estate.
In the specific case of commercial real estate, you can use a 504 loan for any of the following:
- Purchase existing buildings
- Buy land
- Purchase or construct new facilities
- Improvement of existing facilities
- Improvement of land, streets, utilities, parking lots, and landscaping
These loans are available exclusively through Certified Development Companies (or CDC), nonprofit organizations certified and regulated by the SBA.
If you are interested in applying for a 504 loan for commercial real estate, the first step is to find a CDC in your area. This online tool from the SBA will help you do just that.
The typical structure of a 504 loan looks like this:
- 50% is financed by a private lender
- 40% is financed by the CDC and guaranteed by the SBA
- 10% is a down payment provided by the business owner (the down payment can be higher in some cases)
Here are some key facts to keep in mind when considering a 504 loan for commercial real estate:
- Loan amount: up to $5 million (CDC loan portion)
- Repayment terms: Both 10- and 20-year terms are available
- Interest rates: Fixed for the CDC portion of the loan; the portion provided by the private lender can be fixed or variable
7(a) Loans and Commercial Real Estate
The scope of 7(a) loans is wider compared to 504 loans. In fact, 7(a) loans are known as the “Swiss knives” of loans, because they can serve many different purposes, including working capital or purchasing furniture.
While 504 loans are the most obvious alternative for commercial real estate, you can also use 7(a) loans in some cases.
The SBA allows business owners to use a 7(a) loan to purchase commercial real estate when real estate is part of a business purchase.
This means that you can use a 7(a) loan when you buy an existing business and the transaction includes the properties owned by the business.
Here are some key facts to keep in mind when considering a 7(a) loan for commercial real estate:
- Loan amount: up to $5 million
- Repayment terms: up to 25 years
- Interest rates: Can be fixed or variable, depending on the lender
How To Qualify for an SBA Loan for Commercial Real Estate?
Not all businesses are eligible for SBA loans. In general, you should meet at least the following basic requirements to access SBA financing:
- Operate as a for-profit company in the U.S. or its possessions.
- Be considered a small business according to SBA standards (use the table available here to find out if your business falls within the size guidelines).
- Your business should NOT be engaged in nonprofit, speculative, or passive activities.
- Demonstrate that you are able to repay the loan.
Other conditions may apply depending on the lender and type of loan. Contact the SBA or your local CDC to get personalized information.
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