SBA Loans For Real Estate: SBA 504 VS 7(a) Loans Comparison
The SBA has several options for small business owners in need of a business loan for real estate. Of the six types of SBA loans, 7(a) loans and 504 loans are the two most viable options for real estate purchases.
Other SBA loans (CAPLines, Export, Microloans, and Disaster) either prohibit borrowers directly from using funds for real estate or are not set up in a way to support such purchases.
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Types Of SBA Real Estate Loans: 504 Loans & 7(a) Loans
If you’re seeking an SBA real estate loan to buy property, the 504 and 7(a) loan programs are your best bets. While both can be used for real estate, they have some differences that can make one better for small business owners than the other.
The main differences are in where the funding originates, the loan structure, and the SBA loan down payment. SBA 504 loans are supported by both the SBA and CDCs (Certified Development Companies) and have strict loan structures in which the borrower is only required to make a down payment of 10%.
A 7(a) loan is backed only by the SBA. The loan structure can vary dramatically, depending on the risk involved with financing– 10% is the minimum down payment required.
SBA 504 loans offer fixed-rate financing, while 7(a) loan products offer lower but variable fees adjusted quarterly.
SBA 504 Loans For Real Estate: The Basics
The SBA 504 loan is a program backed by the SBA and Certified Development Companies. These selective loans are open to for-profit small businesses operated by United States citizens and resident aliens. They offer fixed interest rates, long-term financing, and smaller down payments.
The purpose of 504 loans is to promote job creation by supporting small businesses. Recipients are connected with a CDC, a nonprofit organization that is certified and regulated by the SBA. The CDC will then provide financing in partnership with the SBA.
These loans can be used for fixed assets (such as real estate) and a few soft costs. There are strict policies on how the funds may be used — borrowers cannot use financing for working capital, inventory, or consolidation and/or repayment of debt.
Because of the focus on fixed assets, 504 loans are often referred to as SBA Real Estate Loans or SBA Commercial Real Estate Loans. A 504 loan can be used to purchase an existing building, land, land improvements, construct or renovate facilities, purchase equipment for long-term use, or refinancing debt connected to renovation or equipment. This policy makes a 504 loan a great option for a real estate loan.
Additionally, pursuant to the program’s goal of promoting job creation, a business must generally create or retain one job for every $65,000 borrowed. If not, your project must meet a public policy goal as defined by the SBA.
Rates & Terms
SBA real estate loan rates do vary depending on loan and lender. SBA 504 loans are known for long-term fixed rates and fees, set by the current market rate for 5- or 10-year Treasury issues. Fees may include:
- Interest rates
- CDC servicing fees
- Central servicing agent fees
- SBA guarantee fees
- Bank fees
- Third-party fees
- Prepayment fees
While no limit exists on project size for 504 loans, there is a maximum SBA loan amount of $5 million. This number may rise to $5.5 million for certain small manufacturers or if the recipient intends to use the money to finance an energy-related project.
How To Apply
If you intend to apply for a 504 loan, the SBA asks you to provide proof of:
The 504 loan application guides potential recipients through the process of providing such material. The application is lengthy — thirteen pages, to be exact. You can expect to provide information on your small business’s project costs, energy efficiency goals, debenture pricing, and more. The application can be completed and submitted to your area’s CDC, which will then partner with the SBA Loan Processing Center to determine eligibility. You can get connected with your regional CDC through the SBA’s online resource for small business owners.
You must meet the following eligibility requirements to qualify for a 504 loan:
- You must have a US-based for-profit company
- Your credit score must be at least 680
- Your business must occupy 51% of your building
- Your business’s net worth must be less than $15 million
- You must be able to pay 10% or more of the project costs for the down payment
- You must be able to show your ability to repay the loan on time from your operating cash flow
Read our guide to SBA 504 loans to learn more.
- High borrowing amounts
- Predictable fixed-interest rates
- Relatively easy to qualify for
- Strict usage restrictions
- Must be used to create jobs, retain existing jobs, or to further a public policy goal
SBA 7(a) Loans For Real Estate: The Basics
7(a) loans are the most popular financing option for small business owners. They are backed by the SBA in amounts up to 85%, providing opportunities for businesses that may be ineligible for traditional loans. There are several types of 7(a) loans that provide versatility, long terms, favorable rates, and flexibility for small businesses.
SBA 7(a) loans can be used for a wide variety of needs: working capital, building, renovating, business startups, construction, real estate, equipment, and more, depending on your lender and loan agreement. This versatility, of course, also includes fixed assets (such as real estate purchases). SBA 7(a) loans are flexible and can be negotiated depending on a particular business’s needs; this makes them a viable option for many small businesses purchasing real estate.
Rates & Terms
Rates and terms for 7(a) loans can vary depending on the specific loan agreement, lender, borrower, etc. The SBA Loan Calculator is a great way to understand your loan’s rates and fees better. We track the current SBA loan rates at merchant Maverick.
While your rates and terms will vary depending on the type of SBA 7(a) loan, the maximum borrowing amount for a 7(a) loan is $5 million. Furthermore, a minimum down payment of 10% is typically required.
How To Apply
To apply for a 7(a) loan, you will need to fill out an online form that describes your business and its needs. The SBA uses this information to match you with a lender.
The documents you need will vary depending on which loan you apply for. Typical items you will need are:
- Borrower information form
- Statement of personal history
- Personal financial statement, including credit score
- Business financial statements (Profit & Loss statement, projected financial statements)
- Ownership and affiliations
- Business certificate/license
- Loan application history
- Income tax returns
- Business overview and history
- Business lease
According to the SBA, to be eligible for a 7(a) loan, your business must:
- Operate for profit
- Be considered a small business, as defined by the SBA
- Be engaged in, or propose to do business in, the United States or its possessions
- Have reasonable invested equity
- Use alternative financial resources, including personal assets, before seeking financial assistance
- Be able to demonstrate a need for a loan
- Use the funds for a sound business purpose
- Not be delinquent on any existing debt obligations to the US government
Additionally, a credit score of at least 640 is generally required. See our guide to SBA 7(a) loans for more information.
- Competitive rates
- Relatively easy to qualify for
- Relatively easy down payment requirements
- The application process can be lengthy
- Lots of variance in loan terms, depending on the lender
- You may need to offer personal collateral
SBA 504 VS 7(a) Loans For Real Estate: Which Is Best For Your Business?
Not sure which SBA real estate loan type to pursue? Here are some general tips.
Go for an SBA 504 loan if you want to:
- Finance a real estate purchase
- Finance the improvement of existing real estate
- Purchase equipment
- Refinancing debt connected to renovation or equipment
An SBA 7(a) loan might be a better bet if you want:
- Working capital
- Startup funding
- Financing for fixture/furniture purchases
- Financing for leasehold improvements
- Financing for acquiring an existing real estate business
Now, let’s explore the circumstances in which neither type of SBA loan would be right for you:
- Your business is ineligible to receive an SBA loan (real estate investment firms — firms that hold properties for investment purposes — are among the business types ineligible for SBA loans)
- You run a nonprofit business
- Your business does not operate in the US
- You don’t have the ability to pay a 10% down payment on what you seek to borrow
- You can’t provide a business plan that details how you will use the loan proceeds and repay the loan