SBA Loans
The Small Business Administration of the US government has set up two different loan programs to help small businesses purchase real estate. These programs offer more favorable loan terms than conventional bank loans. The government aims to help businesses grow and be more profitable. In return these companies become more beneficial to our economy, and they pay more taxes. Consequently, many believe the program indirectly funds itself.
SBA real estate loans can be used to purchase, build, rehab or refinance commercial properties. While this site will limit its information to real estate loans, keep in mind that you can use SBA loans to purchase or refinance businesses and equipment, to start a business and for working capital in growing businesses.
Three key features make SBA real estate loans desirable.
- They usually require only 10% down (conventional bank loans require 25%)
- Many loans are fully amortized (conventional bank loans tend to have balloons payments due)
- Certain loans have rates that are fixed for 20 to 25 years (conventional bank loans seldom lock for longer than 10).
If you want to put 25% down anyway, you should consider a conventional owner occupied real estate loan. Their lower fees will probably make them your preference.
Eligibility
The vast majority of American businesses are eligible for SBA loans. To make sure your company is not excluded, we have prepared a brief summary of the SBA rules that determine eligibility. To be eligible, your business must meet standards for size, occupancy, business type and American presence. Likewise, the SBA has eligibility rules for the owners of the business and the property. Borrowers are measured financially, morally and by their residency.
The SBA imposes eligibility rules on all loans. They are generally clear cut. We recommend you take a moment and read this summary on SBA Eligibility.
Qualifying
Once you pass the eligibility screen, you need to make sure you qualify. SBA rules govern eligibility, but each lender has its own rules for qualifying. Even if one SBA lender turns you down; another might say you are qualified. So don't give up too early. Part of Rozelle Financial’s expertise is to help you find a lender that will say "yes!"
Two SBA Loan Programs
The SBA program offers two different types of real estate loans. While some lenders only offer one or the other program, Rozelle Financial presents both programs and an objective evaluation on the benefits and drawbacks of each. Besides being very different in structure and features, each program has its own eligibility rules.
SBA 7a Loans
These loans often offer lower rates and lower payments, so they are easier to qualify for. The 7a loans typically have adjustable rates, based on Prime rate plus a spread that varies from lender to lender. They only have a prepayment penalty for a very short time. They can be used to purchase, build, rehab or refinance real estate. SBA 7a loans cannot exceed $5,000,000.
SBA 504 Loans
A borrower can use SBA 504 loan funds to purchase or construct a building, as well as to refinance in certain circumstances. With this program a borrower actually gets two loans: a 20 year fixed rate loan from the SBA and a fixed or adjustable rate loan from a bank or finance company. The SBA loan has a prepayment penalty for 10 years. SBA loans can provide 90% financing for purchases up to and sometimes in excess of $15,000,000.
Construction Loans
With either of the two SBA loan programs, you also have the option of constructing your own new building. Some people build because they cannot find the right existing building. Other businesses have special physical requirements, so designing the structure makes the most sense. For some people, designing their own building provides a special pride of ownership.
See our discussion on Construction Loans.
