SBA Real Estate Loans for Business Owners

Two programs, two ways to buy property

The 504 program pairs a bank loan with a loan from a certified development company. The 7(a) program is a single loan from one lender and is more flexible.

With a 504 loan, the financing is split. A bank usually provides the first loan on the property, and a certified development company, backed by the SBA, provides a second portion at a fixed rate. The borrower typically contributes a down payment. Read our full guide to SBA 504 loans.

With a 7(a) loan, one lender provides the whole loan, with an SBA guarantee on part of it. It can combine real estate with working capital or equipment in one request. See SBA 7(a) loans.

For commercial property that you do not occupy, such as a pure investment building, SBA programs generally do not apply. ROI Funder does not place commercial real estate mortgages. See our commercial real estate loans page for an honest overview.

The owner-occupancy rule

To use SBA financing for real estate, your business generally must occupy a majority of the property. The purpose is to fund business operations, not rental investment.

SBA rules set a minimum share of the building that the borrower's business must occupy, with higher requirements for new construction. If you buy a building and plan to lease out a large part, the loan may not qualify. Details differ between 7(a) and 504, and they can change. Confirm the current percentage with an SBA lender or on SBA.gov.

If you plan to grow into the space, tell the lender at the start. Some rules allow a portion to be rented temporarily with a plan to take it over. Do not guess on this point, because an error can derail an application late in the process.

Down payment and costs to plan for

Expect a down payment, closing costs, appraisal and environmental review fees, and an SBA fee structure. The all-in cash to close is larger than the down payment alone.

Build a cash-to-close budget that includes:

• The down payment, which varies by program and project type
• Appraisal and environmental report fees
• Title, legal and survey costs
• Guarantee or program fees; see SBA guarantee fee
• Property insurance; see SBA hazard insurance requirements
• Moving, signage and buildout

New businesses and special-purpose properties tend to require a larger down payment. Ask your lender for a written estimate early so you are not surprised at closing.

Buy or keep renting: running the numbers

Compare your total monthly cost of owning, including payment, taxes, insurance and maintenance, with your current rent and expected rent increases.

Here is an illustrative example. Suppose you pay $8,000 a month in rent. A purchase would carry a loan payment of $7,000, plus $1,200 for property tax, insurance and upkeep, for $8,200 a month. The cost is about the same, but you build equity and cap your occupancy cost. If rent is rising or the landlord might not renew, ownership gains value.

But if the down payment would drain your cash and leave you short for operations, the purchase can hurt more than help. Keep a working capital cushion. Our article on cash flow analysis shows how to test this.

Collateral, appraisal and timeline

The property itself is the main collateral, and the process includes an appraisal and environmental review. Expect the closing to take weeks to months.

Because the building secures the loan, the appraisal drives how much can be financed. Environmental reviews can uncover problems with older industrial sites, gas stations or dry cleaners. Plan your purchase contract with contingencies that give you time to complete financing. For more on the pledge, see SBA loan collateral requirements.

Real estate is the slowest category of SBA lending. Negotiate a closing date that fits, and ask for extension rights in the contract.

Funding the pieces around the property

A property purchase rarely covers moving, inventory, equipment and slow weeks. Separate, faster financing can handle the working capital side.

The closing is only part of the cash you need. Equipment, fixtures, signage and the first slow months in a new location can strain cash. ROI Funder does not place the real estate loan itself, but it places equipment financing, working capital and a business line of credit. It considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue, and approved, complete files can be funded the same business day.

Treat that money as a bridge, and check the payback math before borrowing. Applying takes a few minutes and uses a soft credit pull.