The U.S. Small Business Administration (SBA) offers two options for borrowers looking to purchase real estate for their business – the 7(a) program and the 504 programs. We will discuss each but note that the 7(a) program is utilized by most potential borrowers who come to SbaLenders.com due to efficiency and effectiveness of the program.
SBA 7(a) real estate loans
SBA 7(a) loans for real estate are widely popular amongst borrowers and bankers – borrowers love the potential 25-year term and bankers love having a high-collateral loan. Please note that SBA real estate loans must be owner-occupied (at least 51% of the square footage), so SBA loans can not be used to finance investment property.
Key terms of typical 7(a) real estate SBA loans:
Term – 5 years (or 10 years if desired)
Rate – Interest rates are prime (now at 3.25%) + 2.75% maximum, so current range for most borrowers is 4.5% – 6%.
Appraisals – Real estate appraisal (cost $2k – $3k). Environmental appraisal ($1.5k – $2.5k). Business appraisal if business is being purchased ($2k – $3k). Equipment appraisal if significant ($1k – 2k)
Time to close – Forty-five to ninety days, typically depends at the speed at which the borrower can turn around documents
Forms – Personal Financial Statement (SBA Form 413) / Borrower Information Form (SBA Form 1919) / Request for Transcript of Tax Return (IRS Form 4506-T)
Other documents – See our Small Business Loan Checklist for other info requirements
SBA 504 real estate loans
Small business owners considering buying or renovating commercial property or buying gear to expand or grow their companies should think about that the U.S. Small Business Administration’s (SBA) 504 Loan Program or the SBA 7(a) loan program. The 504 loan offers small companies access to the identical sort of long term, fixed-rate financing appreciated by larger businesses. Interest rates are comparable to favorable bond market prices.
The SBA 504 Loan Program defines a company as small if its net worth is below $7million and net profits, after taxes, are below $2.5 million. Just about any sort of legitimate company is eligible for 504 financing, such as manufacturing, wholesale, service, specialist retail or service.
A 504 loan could be used to buy fixed assets such as: property and developments, such as owner-occupied buildings, grading, street improvements, utilities, parking lots and landscaping; building of new facilities, or even to update, restore or convert present amenities; or to buy long-lasting machines and equipment having a helpful life of 10 or more decades. Soft prices like legal and architectural penalties, environmental research, evaluations, and interest and interest on the building and/or interim bank financing may also be rolled into the loan. Funding for different needs like working capital, stock, debt refinancing, or consolidation qualify through another SBA 7(a) Loan Guaranty Program.
A normal 504 loan is organized with fifty percent of the costs provided through a private-sector lender. This senior loan is generally to get a 10-year term in a fixed or variable rate, based upon the connection with the lending company. The debenture is backed with a 100 percentage SBA-guaranty. Along with the last 10 percent of the project cost is supplied by the buyer.
The reduced 10 percent down payment is that the major attraction of this plan. It’s likely to need less from the company if a city, town or the nation hoping to entice companies to their own community is prepared to deliver a little bit of the financing at a poor place. Due to the lower down payment needed and the capability to fund the soft prices, the small company will realize upfront money savings of about $100,000 on a $1 million job.
The maximum SBA loan (aka a “debenture”) could be around $2 million. Select manufacturing businesses qualify for around a $4 million debenture.
Maturities of 10 or even 20 years are available. The fee of the 504 loan is fixed for the life span of the loan also is set if the CDC sells the bond to finance the loan. Effective all-in prices, including all fees and closing costs, on 20-year bonds change monthly.
Typically, the business must inject only 10 percent of their entire project cost, including renovations and soft prices. This permits the company to conserve cash for working capital. (Ordinarily, banks need that a 20 to 30 percent down payment on the cost.) Small companies do not need to be concerned about the prime lending rate moving up and can figure out the specific amount of the mortgage payments for 20 decades. 504 loans are for 10 or even 20 decades. Since the CDC is in second lien position, the creditor performing the 50 percent first lien is prepared to lend in a longer duration. Longer terms decrease monthly payments.
Advantages of SBA 504 program loans versus conventional mortgage financing:
- Low down payment – Typically just 10% of the project cost (often 20% to 30% with conventional loans).
- Fixed rate on the SBA 504 piece of the loan – Rate locked in for this portion of the loan for 20 years.
- Long term – Terms of 10 years or 20 years are possible.
- Low interest rates – 504 loan interest rates are competitive.