SBA Commercial Real Estate Loans: A Comprehensive Guide

SBA commercial real estate loans can be a game-changer for small business owners looking to expand or purchase a property.

The SBA offers several loan programs for commercial real estate, including the 504 loan, which provides long-term, fixed-rate financing for up to 40% of the project cost.

SBA loan proceeds can be used for a variety of purposes, including purchasing or improving a property, refinancing existing debt, or even financing the construction of a new building.

The SBA also has a maximum loan amount of $5 million for commercial real estate loans, which can be a significant advantage for small business owners who may not have the capital to secure a larger loan.

To qualify for an SBA commercial real estate loan, you'll need to meet certain eligibility requirements. These requirements are designed to ensure that the loan is used for a legitimate business purpose and that the borrower has a good chance of repaying the loan.

You must be a for-profit business, either a sole proprietorship, corporation, partnership, or LLC. This is a straightforward requirement, but it's essential to note that non-profit businesses are not eligible.

To qualify for a commercial loan, lenders look at your creditworthiness, the value of the property, business performance, and debt coverage service ratio. This means you'll need to have a good credit score, typically 690 or higher.

You'll also need to have at least two years in business and strong finances. This demonstrates that your business is stable and can support the loan repayment.

Here are the specific eligibility requirements for SBA commercial real estate loans:

These requirements may seem strict, but they're in place to ensure that the loan is used for a legitimate business purpose and that the borrower has a good chance of repaying the loan.

SBA commercial real estate loans are offered through two main programs: the 504 and 7(a) loan programs.

The 504 loan program is not a dedicated commercial real estate loan program, but rather a type of loan offered through the SBA.

The 7(a) loan program, on the other hand, can be used for a variety of purposes, including real estate improvements and purchases.

Here are some key facts about SBA 7(a) loans:

There aren't many types of SBA loans, but the ones that exist are quite useful. SBA real estate loans are offered through the 504 and 7(a) loan programs, which share some similarities but also have their own unique advantages.

The SBA 504 loan program is designed for specific purposes, such as real estate or fixed asset related projects. The loan amount can be up to $5 million, with no maximum limit on total project funding. Interest rates typically range from 5% to 7%, and repayment terms can go up to 25 years.

SBA 7(a) loans, on the other hand, are more versatile and can be used for a variety of purposes, including real estate improvements and purchases. These loans are issued solely by participating lenders, usually banks and credit unions, and are partially guaranteed by the SBA. The loan amount can be up to $5 million, and interest rates range from 10.5% to 14%.

Here's a comparison of the two loan programs:

SBA 7(a) loans are available in amounts up to $5 million, and the average loan amount in fiscal year 2023 was $479,685. The interest rates on 7(a) loans are set based on the prime rate, plus a spread that is negotiated between you and your SBA lender.

If you're looking to expand your business, you'll want to know about the different types of loans available. One option is the SBA 504 loan, which can provide funding for a variety of projects.

You can use an SBA 504 loan to purchase land or a building, or to make improvements to the property, such as adding curbs, gutters, or parking lots.

These loans can also be used to purchase equipment and machinery, which can help increase efficiency and productivity in your business. In some cases, you can even refinance existing debt with an SBA 504 loan.

Here are some examples of how you can use an SBA 504 loan:

However, it's worth noting that SBA 504 loans cannot be used for working capital or inventory purchases.

The loan process for SBA commercial real estate loans is a straightforward and efficient one.

You'll need to provide financial statements, including income statements and balance sheets, to demonstrate your business's financial health.

The Small Business Administration requires a minimum credit score of 640 for SBA commercial real estate loans.

You'll also need to provide a detailed business plan, outlining your goals and strategies for the property.

The loan process typically takes 30 to 60 days, but can be completed in as little as 14 days with the right paperwork.

SBA commercial real estate loans offer favorable terms, including lower interest rates and longer repayment periods.

SBA 504 loans can be available in amounts up to $5 million, although some projects may be eligible for up to $5.5 million. The SBA does not impose a maximum funding amount for the entire 504 loan project.

Repayment terms on real estate uses can be either 20 or 25 years, whereas equipment purchases only have terms up to 10 years. This flexibility allows businesses to tailor their loan repayment to their specific needs.

Interest rates on these SBA real estate loans are based on both the CDC and bank portion of the loan.

The debt service coverage ratio, or DSCR, is a crucial factor in commercial real estate loan qualifications. It's a measure of a company's cash available to pay its current debt obligations.

A DSCR of 6 is considered very healthy, indicating that the business profits sufficiently to cover the debt, as seen in an example where net income is $300,000 a year and annual loan payments are $50,000.

A DSCR greater than 1 means your business has more than enough profit to make loan payments. This is the ideal scenario for lenders.

A DSCR of 1 says that you have exactly enough cash on hand to make your loan payments, but not much cushion for unexpected costs. This is a warning sign that you may struggle to meet your debt obligations.

Lenders usually look for a DSCR that's greater than 1.2 when evaluating your commercial real estate loan qualifications. This ensures that you have a comfortable margin to absorb any financial shocks.

Collateral is a crucial aspect of commercial lending, as it protects lenders in case of default. Lenders want to see a full valuation and appraisal of the property to assure its value will be sufficient to protect their assets.

Commercial lenders don't require collateral for every loan, but they do need to protect their interests. Collateral can classify as something you own, such as properties, vehicles, or even savings.

Real estate is the most frequently used type of collateral, but other property owned by the business may also be acceptable. If your business has no track record or credit rating, you may still receive a commercial mortgage loan, but owners may have to guarantee the loan with their personal assets.

The lender can then recover the funds from the owners in case of default. There are no programs like FHA or VA loans in residential mortgages for commercial lenders, and no private mortgage insurance either.

SBA 504 loans are usually available in amounts up to $5 million, although some projects may be eligible for up to $5.5 million.

The SBA does not impose a maximum funding amount for the entire 504 loan project, giving businesses more flexibility.

Repayment terms on real estate uses can be either 20 or 25 years, whereas equipment purchases only have terms up to 10 years.

Interest rates on these SBA real estate loans are based on both the CDC and bank portion of the loan, with the bank portion having a fixed or variable interest rate that will vary based on your lender and business qualifications.

Interest rates on the CDC portion of the loan are tied to five- and 10-year U.S. Treasury notes and typically range from 5% to 7%.

The current SBA 504 25 year standard rate is 6.093%, and the current SBA 504 25 year refi rate is 6.122%.