If you are looking to purchase commercial real estate, SBA financing is an option that you should definitely keep on your radar. Keep reading to learn more about SBA loans and the reasons why it makes sense to use them for CRE properties.
What Are SBA Loans?
SBA loans are loans partially guaranteed by the Small Business Administration, a government agency created to help Americans start, run, and grow their business.
While there are many different types of SBA loans, you have two main options if you want to buy a commercial property: 7(a) loans and 504 loans. Here are the differences between these two lending programs:
These loans are geared toward purchasing major fixed assets such as land or heavy machinery, or constructing new facilities. 504 loans are available exclusively through nonprofit organizations regulated by the SBA known as Certified Development Companies (CDC). The typical structure of a 504 loan is a 10% down payment made by the borrower, 50% financed by a private lender, and 40% financed by the CDC and guaranteed by the SBA.
The CDC portion of a 504 loan is capped at $5 million. As for the interest rates, they are fixed for the CDC portion of the loan, and can be either fixed or variable for the portion financed by the private lender.
These are general-purpose loans that can be used when a property is part of a business purchase. In other words, you can use a 7(a) loan when you buy a business and the transaction includes the properties owned by that business. 7(a) loans are capped at $5 million and the interest rate can be fixed or variable depending on the lender.
What Are the Benefits of Using SBA Loans To Purchase Commercial Real Estate?
The main benefit of using SBA loans to purchase commercial real estate is that you have the partial backing of the U.S. government.
Thanks to this guarantee, SBA loans feature less stringent requirements, longer repayment terms, and lower down payments compared to traditional bank loans.
Keep in mind, however, that your business must meet certain eligibility requirements in order to qualify for an SBA loan:
- Operate as a for-profit company in the United States
- 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
- Businesses engaged in nonprofit, passive, or speculative activities do NOT qualify for SBA loans.
If you are interested in learning more about how to use SBA loans to purchase commercial real estate, get in touch with SoCal CRE Team: We’ll be happy to offer assistance and answer your questions.
SoCal CRE Team: Commercial Real Estate in Southern California
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