The Small Business Administration (SBA) offers 504 and 7(a) loans that can be used to purchase real estate, construct new facilities, renovate existing buildings, and make improvements on land.
These small business loans have long repayment terms and competitive interest rates, but you need strong qualifications to qualify. You may also need to meet property-specific criteria, such as owner-occupancy requirements.
SBA real estate loans are provided by other lenders, such as banks, credit unions, and Certified Developers (CDCs).
To better understand the unique needs of your business, we'll begin by completing a short survey.
Once you find your perfect match, our team will be happy to guide you through the next steps of the process.
Types of SBA Real Estate Loans
There is no dedicated SBA commercial real estate loan program offered by the Small Business Administration. Instead, SBA real estate loans are offered through the 504 and 7(a) loan programs. SBA microloans cannot be used for real estate purchases.
Although SBA 504 loans and 7(a) loans have similarities, each offers unique advantages for financing commercial real estate projects.
SBA 504 loans (also known as CDC/504 loans) are specifically designed for large equipment and real estate related purchases. These loans are provided by three parties:
Certified development company (40%).
third-party lenders, such as banks and credit unions (50%);
If you're a new business or using the loan for what the U.S. Small Business Administration considers a “special purpose asset,” you may be required to make a larger down payment of 15% or 20%, depending on the project.[0]The SBA provides a 100% guarantee on the CDC portion of the loan.
Use Case
SBA 504 loans can provide funding for:
Purchase of land or buildings.
Land improvements such as adding curbs, gutters, and parking areas.
Building improvements, such as exterior changes and electrical system updates.
Purchase of equipment and machinery.
SBA 504 loans cannot be used for working capital or inventory purchases, and 504 loan projects must also meet job creation or public policy goals established by the SBA.
Prices and conditions
For the CDC loan portion, SBA 504 loans are typically available for up to $5 million, but some projects may be available for up to $5.5 million. The SBA does not impose a maximum loan amount for an entire 504 loan project. Repayment terms for real estate use are 20 or 25 years, while repayment terms for equipment purchases are up to 10 years.
The interest rate on these SBA real estate loans is based on both the CDC portion of the loan and the bank portion. The bank portion interest rate can be fixed or variable and depends on the lender and your business qualifications. However, this interest rate is subject to caps set by the SBA.
Interest rates on the CDC portion of the loan are indexed to five- and 10-year U.S. Treasury bills and typically range from 5% to 7%.
The most common type of SBA loan, a 7(a) loan, can be used for a variety of purposes, including real estate improvements and purchases. Unlike 504 loans, SBA 7(a) loans are typically issued only by participating financial institutions, such as banks and credit unions. These loans are partially guaranteed by the SBA, up to 85% for loans under $150,000 and up to 75% for loans over $150,000.
Use Case
SBA 7(a) loan proceeds can be used for the following purposes:
Buying or leasing land.
Road, parking, or landscaping improvements.
Purchase, expansion or renovation of a building.
New building construction.
Refinancing of debt (in certain scenarios).
Prices and conditions
SBA 7(a) loans are available for up to $5 million, but the average loan amount for FY2023 was $479,685.[0]Repayment terms are up to 25 years for real estate loans and up to 10 years for equipment, working capital and inventory loans.
The interest rate on a 7(a) loan is set based on the prime rate plus a spread negotiated between you and the SBA lender, which is subject to SBA limits and varies depending on the size and length of the loan.
Currently, interest rates on SBA 7(a) loans range from 11.5% to 15%.
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What is the difference between an SBA 504 loan and a 7(a) loan?
Both 504 and 7(a) loans can be used as SBA real estate loans, but 504 loans have lower interest rates and potentially larger loan amounts, while 7(a) loans have more flexible use cases and don't require the loan to meet job creation or community development goals.
Here are some important differences between these options:
Comparing SBA 504 and 7(a) Loans
Up to $5 million for the CDC portion of the loan, or $5.5 million for certain energy projects. There is no cap on total project funding.
It usually ranges from 5% to 7% (based on the CDC and bank portion of the loan).
Currently, it ranges from 11.5% to 15% (depending on the lender and your qualifications, subject to SBA limits).
For real estate purposes, the maximum period is 25 years.
For real estate purposes, the maximum period is 25 years.
Funding will come from three different sources.
Third-party lenders (50%).
100% of the loans are issued by SBA lending partners.
For real estate or fixed asset related purposes only.
Property, equipment, inventory and working capital purposes.
For existing real estate projects, at least 51% of the building must be owner-occupied.
For new real estate projects, at least 60% of the building must be owner-occupied.
Projects must meet either job creation/retention goals or community development, public policy or energy reduction goals established by the SBA.
For existing real estate projects, at least 51% of the building must be owner-occupied.
For new real estate projects, at least 60% of the building must be owner-occupied.
How to Qualify for an SBA Real Estate Loan
The qualification requirements for a 504 loan and a 7(a) loan are largely similar. To get one of these real estate loans, you must:
Being a profit-making enterprise.
Located in the United States and conducting business in the United States
Be a small business as defined by the SBA.
Have good credit (usually a personal credit score of 690 or above).
At least two years of business experience.
Potential real estate projects must be at least 51 percent owner-occupied for existing buildings and at least 60 percent owner-occupied for new buildings.
For 504 loans, you must be able to demonstrate that your project will create jobs or meet public policy goals.
For both of these loan options, you must meet certain SBA requirements, but other requirements may vary from lender to lender.
Who offers SBA real estate loans?
If you're looking for an SBA loan for commercial real estate, you have a few options: SBA loans, such as 7(a) and 504, are often offered by banks, credit unions, and other financial institutions.
For a 7(a) loan, you can start with a bank or credit union you already have a relationship with. Similarly, for a 504 loan, you can go to a bank or credit union, but a CDC is an additional option. The SBA has a list of CDCs on its website. If you start with a bank, they may be able to help you find a qualified CDC (or vice versa).
For both loan types, you can use the SBA’s Lender Match tool to be matched with a lender within two days of submitting your request.
How to Apply for an SBA Real Estate Loan
Both SBA 504 and 7(a) loans have detailed and lengthy application processes, but once you find a lender, they can help you gather the information and documentation you need to complete your application.
Typically you'll need the following:
SBA Borrower Information Form.
Writing personal history.
Personal financial statements.
Personal and business tax returns.
Corporate financial statements.
Lease agreement, if applicable.
To purchase property with loan funds, you will also need to submit a property appraisal, an environmental inspection report questionnaire, a breakdown of costs, and a copy of the purchase contract.
SBA 504 loans require documentation showing how the real estate project will meet job creation and public policy goals.
Which SBA real estate loan is best for you?
Both SBA 504 and 7(a) loans can offer competitive interest rates, long repayment terms, and large business loan amounts.
A 504 loan may be right for you if:
It can achieve job creation and public policy goals.
I would like a lower interest rate.
I want to raise funds only for real estate projects.
On the other hand, a 7(a) loan may be better for you if:
You want a simple loan structure.
It will not achieve job creation or public policy goals.
I want to use the profits for other purposes besides real estate.
If you don't qualify for an SBA real estate loan or need your funds more quickly, consider alternatives like online business loans.
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FAQ
Can I use an SBA loan to buy real estate?
Yes. SBA 504 and 7(a) loans can be used to purchase real estate. These loans can be used to construct new buildings or renovate or expand existing buildings.
When do SBA real estate loans have to be repaid?
Repayment terms vary depending on a variety of factors, including the lender, the creditworthiness of the business, the purpose of the loan, etc. The maximum repayment term for SBA 7(a) and 504 real estate loans is 25 years.
What are the interest rates for SBA commercial real estate loans?
Interest rates on SBA commercial real estate loans vary by lender, loan type, and ability to repay, but are subject to SBA caps. Current SBA 7(a) loan rates range from 11.5% to 15%. SBA 504 loan interest rates tend to be in the 5% to 7% range.
Can I use an SBA loan to buy real estate?
Yes. SBA 504 and 7(a) loans can be used to purchase real estate. These loans can be used to construct new buildings or renovate or expand existing buildings.
When do SBA real estate loans have to be repaid?
Repayment terms vary depending on a variety of factors, including the lender, the creditworthiness of the business, the purpose of the loan, etc. The maximum repayment term for SBA 7(a) and 504 real estate loans is 25 years.
What are the interest rates for SBA commercial real estate loans?
Interest rates on SBA commercial real estate loans vary by lender, loan type, and repayment ability, but are subject to SBA caps. Current SBA 7(a) loan interest rates are:
11.5
to %
15
%. Interest rates on SBA 504 loans tend to range from 5% to 7%.
A version of this article originally appeared on Fundera, a subsidiary of NerdWallet.