Commercial mortgage interest rates rise and fall with economic conditions, but if you own a successful small business you might qualify for a 25 year fixed rate SBA commercial property loan and be able to rest easy in times of rising rates.

SBA Commercial Property Loan: How to Qualify for 25 Year Fixed Rate

Prime has been back to an all-time low of 3.25% ever since the start of the Pandemic, but the Federal Reserve is now signaling that they will begin to raise rates in 2022.  Most lenders who offer SBA loans do not offer long term fixed rates, but a 25 year fixed rate SBA commercial property loan is a very real possibility for stronger businesses.

No time like the present to see if your small business can qualify for a better loan.

Most business owners who are looking to finance (or refinance) a commercial property either have (or have been offered) one of three types of loans:

1. A Floating Rate – especially likely if an SBA 7a loan
2. A Balloon or Call with their local bank
3. A rate that is fixed for 5, 7 or 10 years with a balloon, call, adjustment or reset at the end of the fixed period.

For number 3 of above, most borrowers have a 5 year fixed with a clock that is ticking…or are being offered a 5 year fixed by their local bank as bank’s prefer to make loans of 5 years vs. a longer fixed period.

SBA Fixed Rate Commercial Property Loans

So, if someone told you that you might be able to lock in a 25 year fixed rate at a similar or possibly lower rate than what you have now, would you do it?

Let me rephrase that…Why wouldn’t you do it?

Think about it.  If you had a low fixed rate commercial mortgage for 25 years you would NOT experience any of the the following:

1. Stress regarding future balloon payments or adjustments
2. Future refinance costs
3. Anxiety and hassle going back to the bank to “re-qualify”
4. The Joy of getting ALL of your loan documentation together again

Furthermore:

1. You could lock in your overhead costs and know exactly what your mortgage costs will be year after year after year.
2. Because these are SBA loans you would not have to concern yourself with a bank’s possibly onerous “financial covenants” like having to come in every year and prove to them how things are going.  With these loans if your payments are on-time you are good to go.

SBA Commercial Property Loans

These programs are purely for small business real estate financing where the subject business will occupy at least 51% of the property.

There are 2 separate programs via the SBA where long term fixed rate commercial mortgages are available – the SBA 7a and the SBA 504.  Both programs are briefly outlined below.

Please note that in the case of the SBA 504 and a building purchase, some qualified businesses can actually borrow the down payment effectively creating 100% financing AND the SBA 7a also provides a way for a business owner to borrow the down payment.

Obviously, there are caveats and nuances with each program, each lender is different (SBA loans are made by lenders and effectively insured by the SBA) and each loan scenario is unique, but below are the basic guidelines for low 25 year fixed rates.

FYI:  There are all kinds of different guidelines for the 504 and the 7a from various lenders that do NOT offer a 25 year fixed rate and there are also some lenders who offer 25 year fixed rates but at high rates.  Below is an overview that encompasses SBA guidelines for commercial fixed rate mortgage loans from a few SBA lenders that offer excellent terms.

SBA Real Estate Loans

25 Year Fixed Rate Guidelines 

1. You typically need good credit and a good credit score.  “Good” usually means mid 600’s, but the quality of the credit is usually more important than the score.  Some lenders require at least a 680 and some will offer extremely low fixed rates for those with truly excellent personal credit.
2. Your business must occupy at least 51% of the building/property for an existing building and 60% of it for ground up construction.
3. Most lenders prefer multi use or generic properties and some lenders will offer long term fixed rate commercial loans regardless of property type, and some prefer more than minimal equity for special use properties like mini-storage or hotels.
4. The best terms are usually available to those who have been in business for at least 2 years and have at least one solid tax return and YTD financials showing enough income to qualify.
5. You can refinance your existing SBA 504 first mortgage and re-subordinate your existing SBA 504 2nd mortgage.
6. As of 2021 you can now refinance an SBA 7a loan with a SBA 504 loan and get a 25 year fixed rate – possibly with “cash out”
7. You can refinance an existing commercial loan but it needs to be at least 2 years old.
8. Some lenders will consider some of the income from tenants to help you qualify.
9. Cash out refinances are possible for legitimate businesses uses, but there is a limit to how much you can get.
10. The 504 loan DOES NOT require additional collateral, the 7a DOES if  you have less than 15% equity AND you have other collateral available (usually equity in real estate), but you should not assume it will be needed until you talk specifics with a lender as there are ways to avoid this.
11. “Zero point/zero origination” options are available.
12. The 504 loan is a 2 loan structure where both loans are fixed for 25 years, but you have the option of taking a 20 year fixed rate second mortgage.
13. The 7a loan is just one loan – fixed for 25 years.
14. With certain 504 lenders, ground up construction or expansion/renovations may require a temporary construction or bridge loan which will add costs to the overall transaction and you will be unable to lock in your permanent loan rates until the work is almost complete, BUT it could still be worth it for a lot of borrowers, because you will be coming out the other side with a 25 year fixed rate.
15. Some lenders allow the down payment for a 504 can be borrowed by the business as long as the you can prove that the business can handle the additional debt – i.e. qualify with the payment on the new debt.
16. There are a few ways the down payment for the 7a can be borrowed.  One popular means of coming up with it is by using equity in a home or investment property as long as you can prove you have another source of income (or income from a spouse) to repay the borrowed funds.
17. 25 year fixed rate 7a loans can be as much as $5 million.
18. 25 year fixed 504 loans can easily be three times that.
19. SBA loans are somewhat notorious for their fees and degree of difficulty and in some cases, this is deserved, but most (good) SBA lenders make the process fairly smooth and while the fees generally run in a relatively eye-popping 2.5 to 2.75% range, consider the trade-off:  no loan fees ever again (no need to refinance ever again), no rising payments ever again, none of what I mention at the top of the article (hassle, anxiety, etc.) ever again.

Bottom line:  The fees are a little high, but the terms are almost unbeatable, so trade off if worth it for most.  It could also be that you need the flexibility that an SBA loan provides from an underwriting or loan to value perspective so it is never a bad idea to at least do the math and have a conversation.

Also, keep in mind that if you cannot qualify for a 25 year fixed rate SBA commercial property loan there might be other (good) options.

Please get in touch if you are interested in exploring whether a fixed rate SBA commercial mortgage is right for you:

jking (at) green  commercial capital (dot) com

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