Commercial Real Estate SBA Loans: 7(a) vs 504 vs Conventional
Using an SBA loan to buy commercial property can require a lower down payment and give you the ability to get working capital to expand your company or even to acquire an existing business.
NEW for 2018: SBA 504 Loan Calculator
Commercial Property SBA Loan Types Compared
If you are buying a business or currently lease your business space, you might think about buying commercial real estate. There are several options for loans to buy commercial real estate.
Comparing loans to buy commercial real estate: SBA 7(a) loans vs. SBA 504 loans vs. conventional loans
The cheapest sources of financing to buy commercial real estate include SBA 7(a) loans, SBA 504 loans, and conventional loans. Here is a brief summary table highlighting some of the similarities and differences of SBA 7(a) loans vs. SBA 504 loans vs. conventional loans.
| SBA 7(a) Loan | SBA 504 Loan | Conventional Loan | |
| Goodwill / Business Purchases | Can be used to buy a business or goodwill | Cannot be used to buy a business or goodwill | Cannot be used to buy a business or goodwill |
| Working Capital | Can be included | Cannot be included | Cannot be included |
| Inventory | Can be included | Cannot be included | Cannot be included |
| Passive Income Investments | Real estate must be 51% owner-occupied; real estate cannot be considered a passive income investment (such as apartments, condos, stripmalls, etc) | Real estate must be 51% owner-occupied; real estate cannot be considered a passive income investment (such as apartments, condos, stripmalls, etc) | No restrictions |
| Down Payment | – 0% for business expansions – 5% for business and real estate acquisitions – 10% for startups | Depends on the type of property and whether new or existing. – 10% for existing non-limited or non-special purpose property – 15% for new, non-limited or non-special purpose property – 15% for existing limited or special purpose properties – 20% for new limited or special purpose properties *limited or special purpose properties include car washes, gas stations, hotels, motels, hospitals, nursing homes, assisted living facilities, marinas, and farms | 25-30% |
| Structure | 0-10% down 90-100% SBA 7(a) loan | Structure must include two different loans: one from the CDC and one from a lender. 10-20% down 30-40% SBA 504 loan from CDC 50% conventional loan from lender (minimum) | 25-30% down 70-75% conventional loan |
| Maximum Loan Amount | $5,000,000 SBA 7(a) loan limit – No limit on additional conventional loan from lender | $5,000,000 SBA 504 loan limit from CDC – No limit on conventional loan from lender (but lender’s loan must cover at least 50% of total project cost) | No limit |
| Interest Rate | – 5-7% – Fixed or variable rate | – 504 portion: fixed rate, 4-5% – conventional loan portion: fixed or variable rate, 5-10% | – 5-10% – Fixed or variable rate |
| Loan Term | 25 year term and amortization | – 504 portion: 20 year term and amortization – conventional loan portion: 10 year term with 15-20 year amortization and balloon payment | 5-10 year term with 15-25 year amortization and balloon payment |
| Net Worth and Credit Score Requirements | Easiest to qualify for | Second easiest to quality for | Hardest to qualify for |
Deciding whether to lease or buy commercial real estate
- If you are an existing business owner who currently leases their business space, you might want to consider replacing your lease payment with a loan payment; this will allow you to spend money to own the real estate, rather than rent it.
Existing business owners can estimate their borrowing limit here by adding their monthly lease payment to the “Discretionary Business Cash Flow”
Commercial Real Estate Calculator Based on Cash Flow
If you are buying a business with option to purchase the real estate, you’ll want to look at both options to determine what makes the most sense.
With an SBA 7(a) loan, if you do not include the real estate purchase in your loan, your loan term will be 10 years. You will make monthly loan payments to purchase the business plus monthly lease payments to lease the real estate
On the other hand, if you do include the real estate purchase in your business acquisition loan, your term can be up to 25 years; this longer term can lower your monthly loan payments. You will make monthly loan payments to purchase the business and the real estate, and will not have a lease payment to make.
| SBA 7(a) Loan | Business Acquisition without Real Estate | Business Acquisition with Real Estate |
| Maximum Term | 10 years | 25 years |
| Monthly Payment | Loan payment to buy business plus rent payment to lease real estate | Loan payment to buy business and real estate (no lease payment) |
You can estimate your business acquisition loan terms with and without real estate here:
SBA Commercial Real Estate Loan Calculator
In summary, an SBA 7(a) loan to buy commercial real estate may be your best financing option. Here’s why:
- Long loan terms: up to 25 years
- Low interest rates: YourEdge™ will assure that you receive the lowest interest rate
- Low down payment: as low as 0% for business expansion and 5% for business acquisitions
- Working capital and inventory included: make the changes you want to in order to grow your business through channels such as marketing, advertising, renovation, and hiring
YourEdge™ Online SBA Loan Application helps save borrowers money by getting them favorable terms including the lowest interest rates, longest loan terms, and lowest down payment. Clients have used an SBA loan for real estate in a number of ways:
- Buying a business with real estate included
- Expanding or relocating an existing business
- Refinancing existing real estate debt. Use our Refinance Debt with SBA Loan Calculator to determine how much you can save by using an SBA loan to refinance business debt, including real estate loans.
See how you can make payments to own real estate, rather than make payments to lease real estate, and estimate your loan terms with our Complete SBA Loan Calculator.
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HOW DO I GET STARTED WITH MY SBA LOAN?
The best online SBA loan platform is YourEdge™ by YourSBA.com:
- Get prequalified within 24 hours
- Start here with YourEdge™
- Find out how much you may qualify for using our Commercial Real Estate SBA Loan Calculator tools here.
- SBA 7(a) loans from $350,000 to over $5 million.
- 5x success rate of your bank
- No fees
- No credit check / No hard credit pull
- No bank runaround
- Online, streamlined application accepted by all of the most aggressive SBA lenders for competitive interest rates and a 95% success rate.
See if you qualify for an SBA loan by taking just a few minutes to complete the quick form here. The pre-approval process takes less than one day and does not require a hard credit pull.
