Looking to purchase real estate, fixtures, or equipment to expand your small business? These necessary expenses can run pretty costly, which is why many business owners turn to outside financing to help carry that burden.
You can explore a number of different funding options—from traditional bank loans to the newer wave of online lenders—but don’t overlook the possibility of SBA real estate loans.
As you might already know, the Small Business Administration offers loan programs aimed towards encouraging entrepreneurship and small business borrowing. While it doesn’t give out loans itself, the SBA guarantees 75% or more of the loans made by certain approved lenders. In short, the SBA gives small business owners the chance to work with long-term, low-interest loans that they’d otherwise never qualify for, by making their otherwise risky investments attractive to lenders.
It almost sounds too good to be true—but it gets even better. If you’re trying to finance those fundamental parts of your business’s expansion, then SBA real estate loans could be the right path for you. Let’s learn what they can offer.
SBA Real Estate Loans: Option #1
Certified Development Company (CDC)/504 Loan Program
If we’re talking SBA real estate loans, then we’re talking the CDC/504 loan program. The SBA specifically designed this program for businesses seeking to fund major assets like real estate or equipment.
According to the SBA, you must meet the following criteria to be considered for a CDC/504 loan:
- Funds must be used for financing real estate and equipment.This includes purchasing land and paying for new construction projects. This type of loan can’t be used for providing working capital or refinancing debt.
- You must be a for-profit company and an eligible type of business. Some ineligible businesses include real estate investment firms, casinos and gambling companies, pyramid sales companies, and rare coin dealers.
- You must operate in the United States.
- Your tangible net worth should be less than $15 million and your average net income should be less than $5 million after taxes for the prior two years.
- You must be deemed able to repay the loan from your projected operating cash flow. and provide the SBA with a personal history from all principals in your company.
- You must have management expertise and a feasible business plan.
Where Do I Apply?
If you meet the criteria for a CDC/504 loan, you can apply for this SBA real estate loan through an approved lender or a CDC, which is a non-profit company set up to contribute to the economic development of its community. CDCs are located nationwide, and they work with the SBA and lenders to provide businesses with long-term fixed-rate loans.
To start off, you should reach out to a CDC in your local area and the organization can walk you through the funding process. In some cases, the CDC secures loans. In others, the CDC may work with a lender who provides 50% of the total funding for the project. The SBA, in turn, typically provides 40% of the project costs, and you would contribute the remaining 10%.
SBA Real Estate Loans: Option #2
7(a) Loan Program
The 7(a) loan program serves a more general funding purpose—you can use your financing for a wider range of business developments, not just related to real estate or equipment. While the CDC/504 program is the immediately obvious choice when you’re thinking about SBA real estate loans, don’t discount the more flexible alternative.
While you can still choose to earmark funds towards purchasing land or buildings, you can also use a 7(a) loan for business renovations, building out a leased property, capital expenditures like meeting payroll expenses, and to help with everyday operating costs.
However, the CDC/504 uses your real estate purchase as collateral, while the 7(a)—since it’s not only for SBA real estate loans—may take business and personal assets as collateral.
Lenders can loan a maximum of $5 million under this program. Although there is no loan minimum, the average loan amount in fiscal year 2012 was $337,730, according to the SBA.
Where Do I Apply?
The best place to start is simply contacting an SBA-approved lender in your area. You can find these through SBA Linc, an online service on the SBA website that connects you with participating lenders. After filling out an online form, you’ll hear back from SBA lenders within two business days—and you’ll be on your way to securing those SBA real estate loans.
To better prepare before talking to a lender, you might want to take a look at the SBA’s loan application checklist to make sure you have all your ducks in a row. If you meet the loan criteria, you’ll then work directly with an approved lender who will help guide you through the application process.
If you’re looking to speed up the historically slow loan process, you do have an option: You can contact alternative online lender SmartBiz. An approved SBA lender, SmartBiz offers loans ranging from $30,000 to $350,000, repayable in 10 years. The company touts 6-8% rates and can fund loans in seven business days after the application is complete, according to the SmartBiz website. Even though the SmartBiz funding process is fast-tracked, be aware that you still have to qualify for financing—just like any other SBA-backed loan.
Pros and Cons of SBA Real Estate Loans
The benefits and dangers of SBA real estate loans mirror those of general SBA loans—they’re great to have, but hard to get.
Although known for a lengthy application process, an SBA loan is nonetheless an attractive option for startups and small companies, especially if you can’t get a loan at a traditional bank. Banks often won’t lend to businesses with credit scores lower than 700 or companies which haven’t been in business for at least a few years.
But if your small company is faring well and you have a credit score starting at about 600, you’re likely a candidate for an SBA loan. Your interest rate for an SBA loan will vary depending on the lender, but the APR is based on the current prime rate plus a spread ranging from 2.25% to 2.75%. In addition, some lenders change fees and closing costs. This generally means you are looking at a rate of around 7-8% on the lower end.
You’ll want to keep in mind that an SBA loan is not typically the fastest way to access capital—it can take up to 75 days to receive funding. The SBA loan application process can also be more cumbersome than other types of loan applications, though as always, you should be prepared to provide an SBA-approved lender with your bank information, personal and business credit reports, tax returns, and other business documents.
For SBA real estate loans, all of the above applies, with the added bonus that you have two loan programs to choose from. And because securing real estate can be a lengthy process anyways, the typical delay in SBA funding might not affect you much or at all.
The post How to Find SBA Real Estate Loans for Your Small Business appeared first on Fundera Ledger.
from Fundera Ledger https://www.fundera.com/blog/2015/12/08/sba-real-estate-loans/