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The Small Business Administration (SBA) provides loans under the 504 and 7(a) programs that can be used for the acquisition of real estate, building improvements, facility construction, and building renovations.
Long repayment terms and affordable interest rates are features of these small business loans, but to be eligible, you’ll need to have excellent credentials. Additionally, you might need to fulfill requirements unique to real estate, like owner-occupancy requirements.
Banks, credit unions, and other lenders like Certified Development Companies (CDCs) offer SBA real estate loans.
What is an SBA loan?
SBA loans are small business loans that are partially guaranteed by the United States Small Business Administration. These loans have high qualification standards, but tend to offer flexible terms and low interest rates — making them popular options for businesses looking for an influx of capital.
No SBA loan can be used to purchase investment or rental properties. However, there are two main SBA loan options available to you if you’re looking to purchase office or commercial space for your business. While 7(a) loans are used for more general purposes, SBA 504 loans are specifically intended to finance real estate and other fixed assets.
What is an SBA 504 loan?
The purpose of the SBA 504 loan is to assist small businesses in growing by enabling them to acquire fixed assets such as real estate. The bank might disagree with your eligibility if your company applies for an SBA 504 loan to purchase a single-family home you intend to use as office space because one of the secondary goals is to promote community development and job creation.
SBA 504 loans have small down payments, long-term financing, and low, fixed interest rates. These characteristics make them particularly alluring to small companies wishing to purchase commercial real estate. In order to obtain an SBA 504 loan, you will coordinate loan terms with a bank and a certified development company (CDC) that has been approved by the SBA. Most of the time, the bank provides 2050 percent of the total funding for a loan, and you pay the CDC 2040 percent of the total funding and the down payment for the loan.
SBA 504 loan rates and terms
Typically, SBA 504 loans fall between $50,000 and more than $20 million. The CDC portion of the loan maxes out at $5. 5 million. SBA 504 loans for real estate have terms of 20 or 25 years for repayment.
SBA 504 loans have two different interest rates because the bank and the CDC each guarantee a different portion of the loan. The CDC-guaranteed portion of the loan will have a fixed interest rate that is unaffected by changes in the market. Over the course of the loan, the interest rate on the bank portion, however, could change in line with the market. That can increase fees later on.
How can you use an SBA 504 loan?
SBA 504 loans can be used for anything that comes under the category of “property, plant, and equipment,” though applicants frequently use them for real estate. So, some of the eligible uses include:
- Purchasing existing buildings.
- Acquiring land and its enhancements, such as parking lots, utilities, landscaping, and street improvements
- Constructing new facilities or modernizing, renovating, or converting existing ones.
- Investing in machinery that has a minimum 10-year service life
- refinancing traditional debt to support business expansion through real estate acquisition or renovation
Again, these loans are designed with active development in mind. When you apply for a loan to finance the purchase of a property, you will be scrutinized because the SBA wants you to use these loans to create jobs.
How to qualify for an SBA 504 loan
To qualify for an SBA 504 loan, you must first meet the minimum expectations:
- running a business for profit but having a net tangible worth of less than $15 million
- The previous two years’ average net income for the company must have been less than $5 million after taxes.
- Operating in the United States.
- able to pay back the loan with your anticipated operating cash flow and give the SBA a personal history from each of the company’s principals
- You must provide evidence of management experience, a workable business plan, and proof that the funding will enable you to meet other public policy objectives or create jobs.
- Lastly, the business must use at least 2051 percent of the real estate it has acquired, or 2060 percent of it for newly constructed buildings.
You can apply for an SBA 504 loan through a CDC or an approved lender if you and your project meet these requirements; however, each may have additional eligibility requirements.
What is an SBA 7(a) loan?
The SBA 7(a) loan program is the alternative route for obtaining an SBA real estate loan. SBA 7(a) loans can be used for a variety of business needs and are intended for more general funding purposes.
The 7(a) loan program, like all SBA loans, forbids the use of loan proceeds for investment properties such as apartment buildings, rental houses, multifamily and single-family homes, etc.
These loans are easier to qualify for and have less complicated structures than 504 loans. You will work directly with a bank or other private lender on an SBA 7(a) loan as there is no involvement from the CDC.
SBA 7(a) loan rates and terms
The maximum loan amount under the SBA 7(a) loan program is $5 million. Although there isn’t a set minimum, most lenders avoid making small loans. In 2021, the average 7(a) loan amount was $704,581.
The maximum repayment period for a 7(a) loan used to buy real estate is 25 years. Interest rates tend to range from 7% to 9. 5% but are subject to economic fluctuations. Additionally, they will demand a down payment of any amount between 2010 and 2020.
How can you use an SBA 7(a) loan?
Funds from an SBA 7(a) loan can be used for many things, including real estate. This money can be set aside for a variety of purposes, such as paying for regular operating expenses or buying real estate. Some of the most common uses include:
- Expanding, acquiring, or starting a business.
- Purchasing or constructing real estate.
- Refinancing existing business debt.
- Purchasing equipment.
- Acquiring everyday operational capital.
- Purchasing inventory.
Once more, you are not allowed to use the money to buy an investment property, but you are allowed to use it to renovate existing property or to purchase a commercial space that your company will actually use.
How to qualify for an SBA 7(a) loan
It is simpler to be eligible for an SBA 7(a) loan than an SBA 504 loan. The base requirements are minimal and include:
- Owners of businesses need to have a minimum personal credit score of 650.
- Companies must have been in operation for at least two years and have a track record of profitability.
- Companies have to fit the SBA’s definition of small, which changes depending on the sector.
- The minimum requirement for any real estate financed under the 207(a) loan is that it must be owner-occupied.
For most small business owners wishing to use SBA capital to buy real estate, SBA 7(a) loans are a better option because they are easier to obtain and have more laxer eligibility and funding oversight requirements.
An SBA loan cannot be used to purchase a home for yourself. SBA loans are only available for the purchase of real estate that will be utilized by the business. Small SBA loans are rarely approved by banks, and the regulations require your company to use at least half of any acquired real estate. The majority of business owners do not want to purchase an investment property for rental purposes only to be able to rent out less than half of it. Thus, be sure the juice is worth the squeeze before applying for an SBA loan to finance a real estate purchase.
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FAQ
Can you take a loan from your business to buy a house?
Yes, you can use business credit to purchase a property. It offers less personal risk and is especially helpful for investors looking for commercial loans. Lenders will look at the value of the property and your company credit history rather than your personal credit history.
Can business credit buy a house?
The majority of homebuyers obtain the required financing through their personal credit, but there are other options as well. If you have a solid credit history, you can also use your business credit to purchase a home.
Can an SBA loan be used to purchase real estate?
It is possible to purchase real estate with an SBA loan. Real estate purchases can be funded by SBA 504 and 7(a) loans. Additionally, new construction as well as renovation and/or expansion of existing buildings are eligible uses for these loans.
Can I use a business loan for a down payment on a house?
It’s likely doable, but there are a few things to keep in mind: mortgage rates are generally lower than those of other loan kinds, such as business loans. This alone may be reason enough to avoid it. The source of your down payment is typically a question on mortgage application paperwork.
Read More :
https://orchard.com/blog/posts/can-you-use-an-sba-loan-to-buy-a-house
https://www.nerdwallet.com/article/small-business/sba-real-estate-loans