The SBA has several options for small business owners in need of a business loan for real estate. Of the six types of SBA loans, 7(a) Loans and 504 Loans are the two most viable options for real estate purchases. Other SBA loans (CAPLines, Export, Microloans, and Disaster) either prohibit borrowers directly from using funds for real estate or are not set up in a way to support such purchases.
Types Of SBA Loans For Real Estate: SBA 504 vs 7(a)
If you need an SBA loan to buy property, a 504 or 7(a) Loan is your best bet. While both can be used for real estate, the two do have differences that make some better for small business owners than others.
The main differences are in where the funding originates, the loan structure, and the SBA loan down payment. 504 loans are supported by both the SBA and CDCs (certified development companies)Â and have strict loan structures in which the borrower is only required to make a down payment of 10%.
A 7(a) loan is backed only by the SBA. The structure of the loan can vary dramatically depending on theÂ risk involved with financing– 10% is the minimum down payment required.
504 loans offer fixed-rate financing, while 7(a) loan products offer lower but variable fees adjusted quarterly.
SBA CDC/504 Loans
The SBA 504 loan is a program backed by the SBA and Certified Development Companies. These selective loans are open to for-profit small businesses operated by United States citizens and resident aliens. They offer fixed interest rates, long-term financing, and smaller down payments.
The purpose of 504 Loans is to promote job creation through supporting small businesses. Recipients are connected with a CDC, a non-profit organization that is certified and regulated by the SBA. The CDC will then provide financing in partnership with the SBA.
These loans can be used for fixed assets, like real estate, and a few soft costs.
There are strict policies on how the funds may be used– borrowers cannot use financing for working capital, inventory, or consolidation or repayment of debt.
Because of the focus on fixed assets, 504 Loans are often referred to as SBA Real Estate Loans or SBA Commercial Real Estate Loans. A 504 loan can be used for purchasing an existing building, land or land improvements, constructing or renovating facilities, purchasing equipment for long-term use, or refinancing debt connected to renovation or equipment. This policy makes a 504 Loan a great option for a real estate loan.
Rates & Terms
SBA real estate loan rates do vary depending on loan and lender. 504 loans are known for long-term fixed rates and fees, set by theÂ current market rate for 5- or 10-year Treasury issues. Fees may include:
- Interest rates
- CDC servicing fees
- Central servicing agent fees
- SBA guarantee fees
- Bank fees
- Third-party fees
- Prepayment fees
While no limit exists on project size for 504 loans, there is a maximum SBA loan amount of $5 million. This number may rise to $5.5 million if the recipient intends to use the money to finance an energy-related project.
How To Apply
If you intend to apply for a 504 loan, the SBA asks you to provide proof of:
The 504 loan application guides potential recipients through the process of providing such material. It is a lengthy application — thirteen pages, to be exact. You can expect to provide information on your small businessâs project costs, energy efficiency goals, debenture pricing, and more. The application can be completed and submitted to your areaâs CDC, which will then partner with the SBA Loan Processing Center to determine eligibility. You can get connected with your regional CDC through the SBAâs online resource for small business owners.
SBA 7(a) Loans
7(a) loans are the most popular financing option for small business owners. They are backed by the SBA in amounts up to 85%, providing opportunities for businesses that may be ineligible for traditional loans. There are several types of 7(a) loans that provide versatility, long terms, favorable rates, and flexibility for small businesses.
7(a) loans can be used for a wide variety of needs: working capital, building, renovating, business startups, construction, real estate, equipment, and more, depending on your lender and loan agreement. This versatility, of course, also includes fixed assets such as real estate purchases. 7(a) loans are flexible and can be negotiated depending on a particular businessâs needs; this makes them a viable option for many small businesses purchasing real estate.
Rates & Terms
Rates and terms for 7(a) loans can vary depending on the specific loan agreement, lender, borrower, etc. The SBA Loan Calculator is a great way to better understand your specific loanâs rates and fees. We track the current SBA loan rates at merchant Maverick.
How to Apply
To apply for a 7(a) loan, you will need to fill out an online form that describes your business and its needs. The SBA uses this information to match you with a lender with whom you can negotiate a loan.
The documents you need will vary depending on which loan you apply for. Typical items you will need are:
- Borrower Information Form
- Statement of Personal History
- Personal Financial Statement, Including Credit Score
- Business Financial Statements
- Profit and Loss Statement
- Projected Financial Statements
- Ownership and Affiliations
- Business Certificate/License
- Loan Application History
- Income Tax Returns
- Business Overview and History
- Business Lease
Do SBA Real Estate Loans Require A Down Payment?
While down payments do vary in size, there is usually a minimum 10% down paymentÂ required from SBA real estate loan recipients. You will also need collateral, which depending on your specific loan, can usually be any property or equity owned by the business. Some lenders will allow borrowers to use personal items, such as a personal home or vehicle, as collateral. Depending on the lender, an SBA loan of any kind may also require a personal guarantee from the borrower.
For real estate financing, SBA 7(a) Loans and SBA 504 Loans are the most viable options for small business owners. Both 7(a) and 504 loans offer reasonable rates and flexibility for business owners, so the best loan for your individual business will rely heavily on the specifics of your needs for real estate.
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