SBA real estate loans

If you need financing for real estate purposes—to buy property, renovate a building or construct a new facility—the SBA has two helpful loan options. 

Buying commercial property or renovating existing facilities is expensive, but it can be a worthwhile investment in your business’s growth and success. Among the myriad financing options available are SBA real estate loans. Keep reading to learn more about how these loans work, what it takes to qualify and how you can apply. 

Paige Smith

Page written by Paige Smith. Last reviewed on August 29, 2024. Next review due October 1, 2025.

The benefits of owning business property

There are countless advantages of owning property as a business owner. Not only can commercial ownership pay off financially if your property appreciates over the long term, but it also gives you more freedom over your day-to-day operations. Here are some benefits to consider:

  • more control over the place where you conduct business 
  • equity in your investment
  • fixed mortgage costs
  • potential to generate rental income later on
  • tax benefits

What is an SBA real estate loan?

An SBA commercial real estate loan is a long-term loan that you can use for real estate purchases and related endeavors, like constructing new facilities, renovating existing buildings and making land improvements. 

Like other SBA loans, SBA real estate loans have long repayment periods and lower interest rates than many other lenders—but the qualification standards are high.

Types of SBA real estate loans

You can’t use SBA Microloans or SBA Express Loans for real estate purposes. However, there are two SBA loans designed for real estate financing: the SBA 504 loan and the SBA 7(a) loan. We’ll go over each one in detail. 

SBA 504 loan program

The SBA 504 loan program provides long-term, fixed-rate financing for major assets that promote business growth and job creation. If you qualify, you can get up to $5.5 million to use for various real estate needs. If you qualify for certain energy-related real estate projects, you could receive a 504 loan for up to $5.5 million per project, for up to three projects. 

The SBA offers 504 loans through Certified Development Companies (CDCs), nonprofit mission-based lenders who contribute to the economic development of their communities. Though CDCs administer 504 loans, they don’t fund the entirety of the loans themselves. CDCs provide 40% of a 504 loan, a third-party lender like a bank or credit union provides 50%, and the borrower covers the remaining 10% as a down payment. The SBA offers a 100% guarantee on the CDC portion of the loan. 

What can you use a 504 loan for?

You can use a 504 loan to purchase existing buildings or land, buy long-term machinery and equipment, and construct new facilities. You can also use the funds to improve, renovate or modernize existing facilities, land, streets, utilities, parking lots and landscaping. 

Imagine, for example, that you own a kids play center and the land it sits on. If you want to build a new facility on the land to expand your play center, you could use a 504 loan to hire an architect and construction crew, as well as pay for construction equipment. 

You can’t use a 504 loan for working capital purposes, to purchase inventory, to invest in rental real estate or to consolidate or refinance your debt. 

Rates and terms for a 504 loan

You can get up to $5.5 million in funds with a 504 loan. The repayment term for real estate uses is 20 or 25 years, and for equipment it’s 10 years. Because you already put down 10% as the borrower, you don’t need to provide additional collateral; the project assets serve as collateral. However, if you own 20% or more of your business, you still need to sign a personal guarantee. 

Interest rates from CDCs are fixed, meaning they won’t change over the course of your loan. The SBA puts 504 loan interest rates at an increment above the current market rate for 10-year US Treasury issues. The interest totals approximately 3% of your debt. As of April 2023, the current interest rate on a 504 loan is 5.8%.

Keep in mind, though, that the interest rate on the third-party portion of the loan can be either fixed or variable, and depends on the lender. 

As for fees, here’s what you can expect with a 504 loan:

  • The guaranty fee for 504 loans is up to 1.5% on the CDC’s share and 0.5% on the third-party lender share. 
  • CDCs also charge a monthly servicing fee of 0.625%-1.5% on your loan’s unpaid balance.
  • The ongoing guaranty fee is 0.9375% of the principal outstanding. 
  • The prepayment penalty starts at 3% of the loan’s value in the first year, then declines each year until it reaches 0% in year 11 (halfway through a 20-year term for real estate purchases). 

To work out the monthly repayments of your loan, use our SBA loan calculator here.

How do you qualify for a 504 loan? 

To qualify for a 504 loan, your business must: 

  • operate as a for-profit company in the United States or its possessions
  • have a tangible net worth of less than $15 million
  • have an average net income of less than $5 million after federal income taxes for the two years preceding your application. 

You also have to fall within the SBA’s small business size guidelines, show a detailed business plan, prove that you have relevant management expertise, and be able to demonstrate good character and an ability to repay the loan. Plus, you have to abide by specific 504 loan guidelines:

  • For existing real estate projects, your building must be at least 51% owner occupied. 
  • For new real estate projects, your building must be 60% or more owner occupied. 
  • Your real estate projects must meet either the SBA’s job creation and retention requirement or at least one community development, public policy, or energy reduction goal. For example, the job creation requirement says that the business must create or retain one job for every $65,000 the SBA gives. 

How to apply for a 504 loan

Take the following steps to apply for a 504 loan:

  1. Collect your financial documents: That includes your personal and business income tax returns for the previous three years, profit and loss statements from the past three years, your business’s debt schedule and financial projections for a one-year period. If you’re buying an existing business, you’ll also need the current owner’s tax returns from the previous three years, an interim financial statement and a signed purchase agreement. 
  2. Update your business plan: Make sure you include a cost breakdown of what you need the real estate financing for, how the funds will contribute to your business’s growth and how the project will satisfy the SBA’s job creation or community development requirements. 
  3. Get your finances in order: Make sure you have enough capital to provide a 10% down payment as part of your financing.
  4. Find a CDC  in your area: Your local CDC will walk you through the loan application process, including providing you with additional loan application documents and connecting you with third-party lenders.

SBA 7(a) loan program

The second option for an SBA real estate loan is the SBA 7(a) loan. This loan, which is the SBA’s most common business financing program, gives you up to $5 million for a variety of financing needs, including purchasing real estate. 

What can you use a 7(a) loan for? 

One of the main appeals of the 7(a) loan is its versatility. You can use the SBA 7(a) loan to:

  • purchase commercial buildings or land
  • construct new buildings 
  • renovate existing buildings 
  • use for long and short-term working capital
  • purchase inventory, equipment, machinery, furniture, fixtures, supplies, and materials
  • refinance debt.

Let’s say, for example, that you own a popular coffee shop in your community and want to buy the building next door to expand into a restaurant. You could use the capital from a 7(a) loan to cover the cost of the purchase, renovate the interior to your liking, and buy new equipment, furniture and lighting for the restaurant. 

Rates and terms of a 7(a) loan

You can get up to $5 million to use on real estate and related expenses for a 7(a) loan. The repayment term for real estate purchases is 25 years. If you use your funds on equipment, working capital or inventory, the repayment term is 10 years. 

Interest rates depend on the lender you work with, but the SBA has maximum rates based on the prime rate. The prime rate as of April 2023 is 8%, which means the current interest rate for 7(a) loans with 25-year repayment terms is 10.75%. Here are interest rates for variable 7(a) loans, according to the size and length of the loan:

  • $25,000 or less: Base rate plus 4.25% if the term is under seven years; base rate plus 4.75% if the term is more than seven years
  • Between $25,000 and $50,000: Base rate plus 3.25% if the term is under seven years; base rate plus 3.75% if the term is more than seven years
  • Above $50,000: Base rate plus 2.25% if the term is under seven years; base rate plus 2.75% if the term is more than seven years

For 7(a) loans used for real estate purchases, you typically need to provide a down payment of 10%. You also have to sign a personal guarantee if you own 20% or more of your business, and might have to provide additional collateral depending on the lender. 

As for guaranty fees, here are the fees charged on the guaranteed portion of the loan: 

  • $150,001-$700,000 = 3.0%
  • $700,000-$1,000,000 = 3.5%
  • 3.75% extra on guaranty portion over $1 million
  • ongoing fee of 0.52% on loans over $150,000.

With 7(a) loans, there’s no prepayment penalty for loans with repayment terms under 15 years. However, for loans with terms over 15 years, you’ll have a prepayment penalty of 5% if you pay your loan off the first year of your loan term, 3% the second year and 1% the third year. 

How do you qualify for a 7(a) loan? 

To qualify for a 7(a) real estate loan, your business has to:

  • Meet the SBA’s small business size guidelines
  • operate for profit
  • be engaged in, or propose to do business in, the US or its territories
  • have reasonable owner equity to invest
  • use alternative financial resources, including personal assets, before seeking financial assistance
  • be able to demonstrate a need for a loan 
  • use the funds for a sound business purpose 
  • not be delinquent on any existing debt obligations to the US government. 

Though you don’t have to meet the SBA’s job creation goals for the 7(a) loan, you do have to abide by two occupancy standards: 

  • For existing real estate projects, your building must be at least 51% owner occupied. 
  • For new real estate projects, your building must be 60% or more owner occupied. 

How to apply for an SBA 7(a) loan

If you want to apply for a 7(a) real estate loan, take the following steps:

  1. Review the application checklist: Check out the SBA’s full application checklist for SBA 7(a) loans, and make sure you have your documents in order. In addition to your business’s income statements and balance sheets for the last three years, you’ll also need tax returns for the past three years and cash flow projections for a one-year period. 
  2. Expand your business plan: In the finances section of your business plan, add an explanation of what exactly you need real estate financing for and how the funds will benefit your business.
  3. Contact a lender in your area: You can search for an intermediary lender in your area here, or register with Swoop to get matched with the right lender for you.

Pros and cons of SBA real estate loans

Using an SBA real estate loan to finance your real estate-related projects lets you preserve your cash while taking advantage of an exciting opportunity. However, before you move forward with an SBA real estate loan, it’s important to weigh the pros and cons:

Pros

  • high borrowing amounts
  • long repayment terms
  • affordable interest rates compared to bank loans and online lenders.

Cons

  • high credit qualification (lenders usually look for scores of 640 or higher) 
  • lengthy application process and turnaround time
  • 10% down payment required.

How to decide which SBA real estate loan is right for you

The 504 loan and the 7(a) loan both give you the option to fund real estate-related ventures in your business, but they have slightly different terms and benefits. Consider these factors when comparing your options:

  • Loan purpose: How will you use the funds? If you want to purchase commercial property, buy heavy construction equipment or undergo a big renovation, a 504 loan is a good—and potentially more affordable—solution. However, if you want to combine a real estate purchase with non real estate needs, a 7(a) loan might be a better bet. The 7(a) gives you the flexibility to use your funds on areas like working capital and inventory, whereas a 504 loan is strictly for real estate endeavors. 
  • Job creation and public policy requirements: If you meet the SBA’s job creation or public policy requirements, the 504 loan can give you a more affordable interest rate than the 7(a) loan. 
  • Collateral: Some 7(a) lenders might require additional collateral on top of your 10% down payment, but that’s not the case with 504 loans. If you only want to put down 10% of your loan, a 504 loan is the way to go. 
  • Fees: Guaranty fees and prepayment penalties tend to be less expensive for 504 loans than 7(a) loans (unless you pay off your 504 loan in the first year). 

The 7(a) loan is a good option for you if you want flexibility to use the funds for non real estate purposes or don’t meet the SBA’s job creation or public policy requirements. 

The 504 loan is a good option for you if you need to finance a real estate project or purchase heavy equipment and you meet the SBA’s job creation or public policy requirements.

Other financing options for real estate

Outside of the SBA, your best option for funding a real estate purchase or renovation project is a loan from a bank. Banks typically have rigid qualifications for eligibility and creditworthiness, but they also offer competitive interest rates and favorable terms.

Another option is a loan from an online lender. Online lenders vary greatly, but they generally have looser credit requirements, more streamlined application processes, and faster turnaround times than banks and the SBA. However, the cost of convenience is significant: online lenders often have lower borrowing amounts, shorter repayment periods, and higher interest rates than banks and the SBA. 

Get started with Swoop

If you need help comparing your funding options for a real estate project, register your operation with Swoop. We provide personalized guidance and comprehensive financing comparisons, so you figure out exactly what works for your business—with less hassle. Ready for easier financing decisions? Join Swoop today.

Written by

Paige Smith

Paige Smith is a content marketing writer specializing in the intersection of business, finance, and tech. Paige regularly features on a number of B2B finance and fintech websites including Fundera, Funding Circle, Fundbox and Nav, amongst others.

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FAQs about SBA real estate loans

Yes, you can use either a 504 loan or a 7(a) loan to purchase real estate. You cannot use SBA Microloans, SBA CAPLines, or SBA Express Loans for real estate. 

The qualifications for SBA loans to buy property are similar to the qualifications for the standard SBA 7(a) loan. You generally need a good credit score (at least 640 or above) and need to be able to put down 10% as a down payment. 

SBA 504 loans are designed specifically for real estate purchases and related endeavors, like construction or renovation. To qualify, you have to put the funds toward a project that satisfies the SBA’s job creation or public policy requirements. 

A 7(a) loan is the most popular SBA loan. You can use it for a variety of purposes, from purchasing real estate to paying for inventory or materials.

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