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.
Page written by Paige Smith. Last reviewed on August 29, 2024. Next review due October 1, 2025.
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:
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.
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.
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.
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.
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:
To work out the monthly repayments of your loan, use our SBA loan calculator here.
To qualify for a 504 loan, your business must:
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:
Take the following steps to apply for a 504 loan:
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.
One of the main appeals of the 7(a) loan is its versatility. You can use the SBA 7(a) loan to:
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.
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:
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:
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.
To qualify for a 7(a) real estate loan, your business has to:
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:
If you want to apply for a 7(a) real estate loan, take the following steps:
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:
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:
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.
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.
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 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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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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