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What SBA loans are available for real estate and their benefits

On Behalf of | Oct 3, 2024 | Real Estate Closing

The Small Business Administration (SBA) offers several loan programs to help small businesses purchase or improve real estate, each with its terms and benefits. Two of the most used SBA loan programs for real estate acquisition are the SBA 7(a) Loan Program and the SBA 504 Loan Program.

SBA 7(a) loan program

SBA-approved lenders, typically banks, credit unions, or other financial institutions, facilitate the SBA 7 (a) loan program. The SBA guarantees part of the loan, which lowers the risk for lenders and helps small businesses get financing more easily.

The amount you can borrow depends on your business’s financial situation and the lender’s assessment of your ability to repay the loan. The maximum amount is $5 million. The advantages of this loan could be:

  • Flexible use: The 7(a) loan can be used for various purposes, including purchasing land or buildings, constructing new buildings or renovating existing properties.
  • Lower down payment: Typically, down payments for SBA 7(a) loans can be as low as 10%, which is lower than conventional loans.
  • Competitive interest rates: Interest rates are generally competitive, often tied to the prime rate plus an additional percentage.
  • Longer repayment terms: The extended repayment period can help improve cash flow by lowering monthly payments.

The loan term for real estate purchases can be up to 25 years. This extended term can help reduce monthly payments, making it more manageable for small businesses.

SBA 504 Loan Program

The SBA 504 loan program involves two lenders: a Certified Development Company (CDC) and a traditional lender like a bank. The CDC provides 40% of the loan, the bank offers 50%, and the borrower typically covers the remaining 10%.

The SBA portion of the loan can go up to $5.5 million, depending on the project and specific goals, such as energy efficiency improvements. The total project cost can be much higher when combined with the bank’s portion. Some benefits of this type of loan are:

  • Fixed interest rates: The SBA 504 loan offers fixed interest rates on the CDC portion, providing stability and predictability in monthly payments.
  • Lower down payment: Like the 7(a) loan, down payments are typically around 10%, which can benefit businesses with limited upfront capital.
  • Job creation requirements: The 504 loan program encourages job creation and retention, making it an excellent option for businesses looking to expand and contribute to economic growth.

The terms for the SBA 504 loan can be either 10, 20, or 25 years. This is particularly beneficial for real estate purchases as it allows for lower monthly payments over a more extended period. It is important for businesses to seek legal advice to know how to apply and get all necessary documentation.

Both the SBA 7(a) and 504 loan programs offer excellent opportunities for small businesses to purchase real estate with favorable terms. The choice between the two will depend on your specific needs, financial situation, and long-term business goals.