For many small businesses, investing in commercial real estate is a substantial but valuable undertaking. There are various options for financing such a purchase. A loan from the Small Business Administration can be a very lucrative way to help pay for your commercial real estate. Understanding the ins and outs of getting an SBA loan will help you decide if this is the right choice for you.

What Are the Loans?

SBA real estate loans are typically under the 504 or 7a programs. These provide low fixed or variable rates (depending on your chosen program) that are partially guaranteed by the government. This mechanism allows businesses to more easily borrow larger amounts of money than they may otherwise be eligible for.

Who Is Eligible?

The vast majority of businesses are small businesses. The government defines this as any company that has a net worth of $7 million or less and net profits of $2.5 million or less (after taxes). Furthermore, almost every type of business can be eligible for loans, including retailers, professional service providers, manufacturers and many others.

To receive a loan, the borrower must be approved by a lender that works with the SBA. This process also involves approval by the SBA itself. Assuming that all parties can agree to a loan, the funds will then be provided to the borrower by the lender, not the SBA.

What Can You Expect?

Part of the attractiveness of the 504 program is the low requirement of 10% down on real estate purchases. For many businesses, this is a huge advantage over traditional real estate financing. Typically, the loan-to-value ratio can be relatively favorable compared to other options thanks to the government guarantee. Furthermore, since the rates are low, the loans are often much more favorable than hard money loans or other alternatives to conventional real estate financing.

Of course, not everyone can be approved for such loans. The specifics of the approval can vary depending on the lender. However, you should expect to need consistent positive cash flow. Additionally, it can help to have other capital assets.

The loan terms are typically between 10 and 25 years, depending on the lender and program. They are usually fully amortized, meaning that you won’t have a big balloon payment at the end.

Learn More

Discover more about SBA loans today. These loans can be very favorable for investing in commercial real estate for your business.