If you are looking for loans to finance the purchase, renovation, or improvement of any commercial property or real estate, the U.S. Small Business Administration (SBA) is your best bet. You can choose from their different business loans and offers that fit your requirements. A few popular SBA commercial real estate mortgages are SBA 504 and the 7(a) loan. Though it can be a bit tough to qualify for either SBA real estate loans, these have competitive rates compared to other financing options available in the market. Just spend some time and effort to complete the application process, and you’ll have the required amount for all your business needs.
What is an SBA Loan
Small Business Administration (SBA) in the US offers loan programs to encourage entrepreneurship and small business borrowing.
Types of SBA Real Estate Financing Options
Small Business Administration (SBA) in the US offers loan programs to encourage entrepreneurship and small business borrowing. Though the administration does not give out loans, it guarantees a fairly huge portion of the loans made by approved lenders and banks, providing small business owners low-interest, long-term mortgages, without much ado. Business owners who require capital to purchase high-value assets can either opt for the CDC/504 or SBA 7(a) loan program to address their commercial real estate needs.
What is an SBA 504 Loan Program?
The 504 is a primary SBA loan specifically designed for businesses that want to fund major asset purchases such as real estate or equipment. The purpose of SBA 504 loans is to facilitate job creation and community development. This financing option can be availed from a bank and an SBA-approved certified development company (CDC).
The CDC is usually fully backed up by a 100% SBA guarantee and provides 40% of the project cost. The remainder 10% will have to be paid as down payment by the borrower, which is comparatively lower than standard commercial real estate mortgage terms.
SBA 504 Loan Interest Rates & Terms
The SBA CDC/504 loan has the best rates, as compared to other mortgages. A borrower can avail from USD 50,000 to over 20 million, with CDC’s portion of the maximum amount being USD 5.5 million. This amount has a fixed interest rate that ranges between 3.5% to 6%. While the interest rate on the amount provided by the bank may fluctuate as per the market, the borrower’s portion remains constant. Banks and CDCs may charge fees that can increase the total loan cost.
SBA 504 Loan Required for
504 is designed for the purchase or renovation of property, plant, or equipment, though it is combined with real estate. However, you can’t use this loan for working capital or refinance a pre-existing debt. Here’s how you can put the money to use:
- Purchase existing buildings
- Purchase land and land improvements, including grading, landscaping, parking lots, street improvements, and utilities
- Refinance debts for business expansion and new or renovated facilities
- Construction of new facilities
- Modernize, renovate, or convert existing facilities
- Purchase or upgrade equipment and machinery
SBA 504 Loan Eligibility
To avail of the SBA CDC/504 loan, a borrower has to fulfill certain eligibility criteria mentioned below. Once these requirements are met, the loan application can be furnished to the approved CDC or lender. At times, the lenders may have their own sets of criteria, such as minimum revenue requirement or credit score.
- Businesses must be operational in the US.
- A borrower should have a feasible business plan and management expertise.
- Should be a for-profit company having a tangible net worth less than USD 15 million. The average net income should be less than USD 5 million after taxes for the previous two years.
- Ability to repay the loan from projected operating cash flow
- Provide the SBA with a personal history from all principals in the company.
- Should have the ability to create jobs or meet other public policy goals.
- The real estate financed should be at least 51% owner-occupied and 60% in new construction.
How to Apply for an SBA CDC/504 Loan?
Though applying for a 504 loan can take its own sweet time, it’s worth all the wait at the end of the day. It sure does require a bunch of paper, like other loans. Borrowers will also have to furnish documentation about job creation and public policy goals.
List of Documents needed to apply for an SBA CDC/504 Loan?
Complete business plan
The purchase agreement, in case of property buying
Business and personal tax returns of the last three years
Personal credit history and financial statement
Personal budget analysis
Business financial statements and debt schedule
Accounts receivable and accounts payable aging
Interim financial statement
What is an SBA 7a Loan?
Another option for SBA commercial real estate loans is SBA 7(a). This mortgage can be used to finance a range of business requirements, apart from real estate or equipment purchase. With a simpler structure that the 504 loan, the 7(a) program is an ideal financing option for working capital and real estate financing. Small business owners can approach banks and private lenders to avail this loan.
SBA 7a Loan Interest Rates & Term
Another option for SBA commercial real estate loans is SBA 7(a). This mortgage can be used to finance a range of business requirements, apart from real estate or equipment purchase. With a simpler structure that the 504 loan, the 7(a) program is an ideal financing option for working capital and real estate financing. Small business owners can approach banks and private lenders to avail this loan.
SBA 504 Loan Required for
Though 7(a) loans usually fund a building or land purchase, they can also be utilized for business renovations, capital expenditures, payroll expenses, everyday operating costs, construction on leased property, working capital, etc. A few other uses, where the SBA 7(a) can be put to are:
- Purchase or construct real estate
- Acquire, expand, or start a business
- Purchase equipment
- Provide working capital for business
- Buy inventory
- Refinance existing business debt
- Construct leasehold improvements
SBA 7(a) Loan Eligibility
Business owners who have a minimum credit score of 650 are eligible for the SBA 7(a) loan. They also must show proof of over two years in business and a history of profitability. To qualify for the desired amount, owners must meet the SBA’s definition of a small industry. Another criteria to avail the funds is to have a real estate or property that should be at least 51% owner-occupied.
How to Apply for an SBA 7(a) Loan?
Like any other loan, applying for a 7(a) loan requires proper documentation that proves the borrower’s credibility. Here’s a list of documents that should be furnished with the application. Apart from these, the borrower will also be required to provide SBA Form 1919 and SBA Form 912, in addition to other documents that the bank may ask for.
- Driver’s license
- Canceled business check
- Personal and business tax returns of the previous three years
- Business plan
- Bank and financial statements
- Real estate appraisal
- Business debt schedule
- Valuation of any other collateral, in case the borrower needs working capital
SBA loans have been the most-coveted funding options because they have low-interest rates and long repayment terms, making it easier for businesses to manage large investments without much disruption in the cash flow. However, on the flip side, the application process is quite lengthy, and it can take around one to three months for the funds to be credited. There are prepayment penalties in case the mortgage is paid off in the first half of the tenure.
Despite all this, with excellent rates and terms, SBA commercial real estate mortgages are the best choice to purchase that next building, office space, warehouse, or any other property that will help businesses grow to the next level.
