SBA Commercial Real Estate Loan Guide

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Do you need funding to purchase, renovate or improve real estate for your business? An SBA 504 loan or 7(a) loan could work if you meet the qualification criteria. But keep in mind that the application process is relatively complex, so you’ll need lots of time and patience to reach the finish line. Otherwise, it may be worthwhile to explore other small business lending options through an online platform, like Lendio, to get fast funding.

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Types Of SBA Commercial Real Estate Loans

The SBA offers two types of commercial real estate loans

  • SBA 504 Loan: fixed-rate financing of up to $5 million to help cover the cost of major fixed assets that help expand businesses and create more job opportunities 
  • SBA 7(a) Loan: fixed-rate financing of up to $5 million for small businesses with unique needs, particularly when real estate is involved in the transaction

SBA 504 Loan

SBA 504 Loans are offered by Certified Development Companies (CDCs) that are both regulated and certified by the SBA. 

SBA 504 Loan Uses

SBA 504 loans can be used to purchase long-term machinery, equipment, land and buildings. You can also use the loan proceeds to construct new facilities or improve existing facilities, landscaping, utilities, parking lots and land. 

However, business owners are prohibited from using 504 Loans to invest in real estate, inventory or working capital. You’re also not allowed to repay, consolidate or refinance debt. 

SBA 504 Loan Terms and Rates

You’ll get 10 or 20 years to repay the loan. The interest rate is above the current market rate for 5-year and 10-year U.S. Treasury issues. It accounts for around 3 percent of the loan. 

SBA 504 Loan Qualifications

You may be eligible for a 504 Loan if you meet these eligibility criteria: 

  • Are a for-profit company operating in the United States
  • Have a net worth below $15 million
  • Have an average post-tax net income below $5 million for two years before you apply
  • Have qualified management expertise, stellar character and a solid business plan 
  • Demonstrate that you have the means to repay the loan
  • Meet the SBA size guidelines

SBA 504 Loan Application Process

Connect with a CDC in your local area to learn more about the application process, documentation requirements and how to move forward with applying for a 504 Loan. 

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SBA 7(a) Loan

These loans are offered by SBA-approved lenders. 

SBA 7(a) Loan Uses

SBA 7(a) loans can be used in many ways, including purchasing machinery, fixtures, supplies, furniture, land, buildings, inventory or new business. Some business owners also use the funds to refinance current business debt, purchase a new business, expand current operations, or renovate an existing building. 

SBA 7(a) Loan Terms and Rates

Below are the rates for both fixed and variable rate 7(a) loans: 

Fixed-rate: 

  • $25,000 or less: the prime rate from the first business day of the month plus 8.0% (800 basis points) 
  • $25,000 to $50,000: the prime rate from the first business day of the month plus 7.0% (700 basis points) 
  • $50,000 to $250,000: the prime rate from the first business day of the month plus 6.0% (600 basis points)
  • $250,000 or more: the prime rate from the first business day of the month plus 5.0% (500 basis points)

Variable rate: 

  • $25,000 or less (repayment period under 7 years): base rate plus 4.25 percent 
  • $25,000 or less (repayment period greater than 7 years): base rate plus 4.75 percent 
  • $25,000 to $50,000 (repayment period under 7 years): base rate plus 3.25 percent 
  • $25,000 to $50,000 (repayment period greater than 7 years): base rate plus 3.75 percent 
  • $50,000 or more (repayment period under 7 years): base rate plus 2.25 percent 
  • $50,000 or more (repayment period greater than 7 years): base rate plus 2.75 percent 

Loan terms are limited to 25 years for real estate or 10 years for inventory, working capital and equipment loans. 

SBA 7(a) Loan Qualifications

SBA 7(a) loans are open to for-profit businesses operating in the United States that meet the following qualifications: 

  • Have an amount of invested equity that’s deemed reasonable by the SBA
  • Not have any past-due debt obligations with the U.S. government 
  • Use personal assets and other financial resources before applying
  • Have a viable business need and the ability to demonstrate how the funds will be used

SBA 7(a) Loan Application Process

Before you can formally apply, you’ll need to connect with an SBA-approved lender. They will advise you on the documents required to prepare your loan package, which include: 

  • SBA Form 1919 (Borrower Information Form)
  • SBA Form 912 (Statement of Personal History)
  • SBA Form 413 (Personal Financial Statement) 
  • Projected financial statements 
  • Profit and loss statement 
  • Signed business and personal tax returns for the past three years 
  • Business licenses and certificates
  • Business lease agreement (if applicable) 
  • Resumes for each principal in the business 
  • A list of the names and addresses of entities your company is affiliated with
  • A written history of the business, key challenges and funding needs 

If you are planning to use a 7(a) loan to acquire another business, note you’ll also need financials for the entity and other documents.

SBA Loans Pros and Cons

SBA loans come with both benefits and drawbacks you should consider when deciding if they’re a good fit for your business. 

SBA Loan Pros

  • Competitive interest rates and flexible loan terms 
  • Extended repayment periods 
  • Generous loan amounts

SBA Loan Cons

  • Limitations on how the proceeds can be used
  • Extensive documentation requirements 
  • Long wait periods to get a lending decision 
  • Prepayment penalties if you wish to pay the loan off early

SBA Real Estate Loan FAQs

Can you use an SBA loan to buy commercial property?

Yes. You can use SBA 504 and 7(a) loans to buy commercial property.

Can an SBA loan be used for a rental property?

No. You cannot use SBA 504 and 7(a) loans to purchase rental properties

Do SBA Real Estate Loans have a prepayment penalty?

Yes. You’ll pay a prepayment penalty on 504 loans if you repay the balance during the first half of the loan. For example, if you have a 7(a) loan with a term of 15 years or more, you’ll incur a penalty if you prepay more than 25 percent of what’s owed on the loan. 

Use SBA Loans to Access the Funds to Buy Real Estate

The Small Business Administration (SBA) loans can be a suitable option to access the working capital needed to expand your current business or acquire a new one, as well as to purchase real estate. You can use an online platform like Lendio to explore your options for over 75 reputable lenders, including SBA-approved lenders. Moreover, it’s fast, easy and won’t impact your credit score. 

Get started today by submitting an online inquiry. Even if you don’t qualify for an SBA loan, your business could secure an alternative source of financing in as little as 24 hours. 

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