A crucial element for success in investment in commercial real estate (CRE) is knowing your loan options before you acquire, expand or build your next project. While there is several funding programs available to CRE investors, the SBA 7a loan can be a great long-term loan to help buy, build, or expand an existing business investment. Find out how the SBA 7a loan program works, including who is eligible and how real estate investors can use the 7a loan.
What is the SBA 7a loan program?
An SBA 7a loan is a loan issued by a senior lender, such as a bank specializing in SBA loans, and is guaranteed by the Small Business Administration (SBA) of the United States.
The preferred SBA lender provides the funds for part of the loan, the rest having an SBA guarantee. This means that if the borrower defaults on the loan, the SBA will pay up to the guaranteed amount. There are several loan programs that fall under SBA 7a, including:
- Standard 7a.
- 7a small loan.
- SBA Express loan.
- Express export loan.
- Working capital loan for export.
- International trade loan.
The interest rate, loan term, prepayment period, down payment requirement and maximum loan amount will vary depending on the loan program used.
How real estate investors can use a 7a loan
While the SBA was designed to help small business owners, real estate investors can qualify for an SBA loan for a variety of projects:
- Purchase of an existing commercial building.
- Expansion of a current commercial property.
- Ground construction.
The most common SBA loan program for real estate is the Standard 7a Loan, which is a long-term loan that provides funding for up to 25 years. Some 7a loans are fixed rate, although most real estate interest rates are variable. Loans over $ 50,000 have a base rate (linked to LIBOR) plus 2.75% and are typically adjusted on a quarterly basis.
The biggest advantage of an SBA loan, such as the 7a for real estate, is the low down payment requirement, which ranges from 10% to 15%, not to mention the fact that it is a long term loan. This means that the investor can get a relatively low interest rate amortized over a long period of time, thereby removing the hurdles of selling or refinancing to pay off a shorter term. balloon loan which is more commonly used in traditional business loans.
Who is eligible for an SBA 7a loan?
Real estate investors who own existing commercial property or are working on a new acquisition in the United States or its territories can apply for a 7a loan from a senior lender, up to a maximum amount of $ 5 million.
Most SBA loans are asset-based, which means that the current or potential performance of the property weighs heavily on loan approval. While ownership is the top priority, borrower credentials also play a role in approving or denying a loan or if there are additional conditions, such as pledging a collateral, are required to be eligible. The lender and the SBA will consider the following:
- Credit score.
- Debt-to-income ratio.
- Experience in real estate and business.
- Net value.
- Personal contribution (how much money and property you have or put into the business).
Things to consider before getting a loan 7a
While SBA loans can be a great way to finance a business investment, they do come with downsides; the first of which is the fees. The SBA charges a guarantee fee, which varies from 2% to 3.5% depending on the size of the loan, which is charged in addition to the lender fees and closing costs, which means that the initial cost of this loan may be higher than other funding programs. The application and subscription process can also be lengthy and take four to eight weeks to complete. If you are looking for financing quickly, you may want to consider other options first.
But in general, an SBA 7a loan can be a great option for financing your real estate investments. It is a good idea to find a qualified and experienced SBA Preferred Lender and establish a relationship with them before you need financing. Find out exactly what documents are needed and what the process looks like so you are ready when the time comes to apply. Ask if there are other collateral requirements, like your personal home or other investment property, and find out if other financing programs will work better for you based on your needs.