What is an SBA Real Estate Loan?
An SBA real estate loan is loan backed by the Small Business Administration (SBA) that is used to buy commercial real estate. While the SBA’s most popular loan program, the 7a loan, can be used to purchase real estate (and just about any other business-related asset), the SBA has other loans more suited for financing real estate. These include SBA 504 loans and SBA business mortgage loans. For these loans, the commercial property you’re buying acts as a lien during the life of the loan, guaranteeing the lender some collateral in case you find yourself unable to afford payments. SBA 504 loans are meant to finance fixed assets, whether real estate, equipment, or other related business needs, like renovating or modernizing a building. They can be for amounts of up to $5 million, with payment terms of up to 25 years, and interest rates of up to 5.15%. Business mortgage loans, on the other hand, are specifically for buying commercial real estate. They can have payment terms of anywhere between 2 – 20 years, and usually, have interest rates between 3.35% – 6%. They can also have amortized or balloon payment structures, and lenders will sometimes include pre-payment penalties to make sure they will benefit from the interest over the life of the loan.
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One attractive feature of SBA loans is low-interest rates. Specific rates differ among the various types of SBA loans and are affected by the size, length, and the borrower’s credit. For SBA 7a loans, interest rates can be anywhere from 2.25% – 4.75%over prime, depending on the details of the loan. For SBA 504 loans, rate maximums go from 4.88% – 5.15%, while for business mortgage loans, they’re typically between 3.35% – 6%.
Like with interest rates, credit requirements will vary depending on the type and size of the loan you want to take out, and what you intend to use it for. That said, the SBA wants to see strong credit scores generally (~680). Your business credit history is also very important, and lenders will typically require that your business has been going for two years or more and that it’s running profitably. For both personal and business credit, simply paying your monthly bills consistently and on time and not having any outstanding debts is the best way to make sure your credit stays healthy. Having enough revenue to make down payments and ensure the ability to pay off the loan is also important. Business mortgage lenders, for example, will often require a down payment of 20% – 30% of the property value, while for 504 loans down payments are normally 10% – 15%. Down payments are important because of the significance your LTV (loan-to-value ratio) will have on your eligibility and on the terms of your loan. The more you can give upfront on your loan, the smaller your LTV will be, reducing the risk for the lender and creating better terms for you. While many other lenders of commercial property loans will require an LTV of no more than 70%, SBA loans, aimed at making small business financing more accessible, allow LTV’s of up to 90%.
Commercial property means anything from retail stores (including restaurants) to office buildings, clinics, hotels, malls, farmland, multifamily housing, or warehouses. Properties are categorized into classes based on quality. An office building, for example, can belong to one of three classes. Class A means the best available building in terms of infrastructure, location, age, and appearance. Class B refers to buildings that may need restoration and are less competitively priced. And class C buildings refers to buildings that are old (20 years or more), require maintenance, and are poorly located.
How to Get an SBA Commercial Real Estate Loan
Qualifying for an SBA loan requires that your business be considered small. For the 504 loans, this means that your business’s net worth must not be greater than 15$ million and that on average it does not yield more than $5 million in profits after two consecutive years. For a 7a loan, on the other hand, is considered a small business requires that your annual sales are not greater than $33.5 million if you’re in service, retail, or agriculture and that your number of employees is under 1000 if you’re in manufacturing or wholesale. With SBA real estate loans, actual funding time can be up to 75 days, since the SBA will need to review not only your personal financial history but that of your business as well. To help along the process, it’s a good idea to make sure you have all your banking information, tax returns, personal and business credit reports, and all business-related documents ready. If you want some help navigating all of this, feel free to use the chat-box in the bottom-right corner to talk to one of Online Loans’ trained financial advisors.