If you need a business real estate loan then it is hard to find a better value than SBA real estate loans – especially at the moment given the additional incentives provided by the small business stimulus recently passed by Congress.
SBA real estate loans were already a great option for a small business purchasing a business property.
Even before the stimulus you could get commercial real estate loans with no down payment but the recent enhancements by Congress have made them better.
SBA Real Estate Loans – Benefits
Typically, a small business will utilize an SBA loan to finance business property to get the following benefits:
- Higher leverage or low or no down payment.
- Ability to buy a business and the business’s property in one loan – possibly with a 25 year term/amortization.
- Low 25 year fixed rates or at least a 25 year term and amortization with no balloon.
- Refinance a floating rate loan or balloon.
- Flexible construction financing that in some cases allows the first few years of payments to be financed into the loan.
- Flexible underwriting that allows a business to qualify if a conventional bank loan is not an option due to cash flow, credit (including a prior bankruptcy), time in business/startup or other concerns/shortcomings.
- The ability to finance other debt, purchase of equipment or costs into the loan.
- Buyout a partner as part of a refinance.
SBA Small Business Stimulus – Real Estate Loan Benefits
The most recent coronavirus/COVID relief bill contains a lot of benefits for all types of small businesses including more PPP and EIDL loans, but for borrowers looking for a commercial building loan the SBA 7a and 504 program enhancements provided by the stimulus offer some key benefits that will help many small businesses.
No Fees and 6 months of “Free” Payments
For all loans approved and closed between February 1st 2021 and Sept 30 2021 the SBA will provide the following significant benefits for a small business financing property and/or other business needs:
- Waiver of SBA loan fees
- 6 months of payments up to $9000/month
- An increase of the SBA Guaranty
SBA Real Estate Loan Fees
Taking these one by one…the SBA fee waiver is a big deal. One of the downsides to SBA lending are the higher fees as each loan has a fee that is baked into the loan amount depending on which program you are using.
The fees are higher than a conventional bank loan, but they are financed into the loan and the trade-offs are very positive.
For the SBA 7a program the fee can be anywhere from approx 2.3% on a smaller loan of $350K to approx 2.75% on a loan of $5 million. Many borrowers have an initial allergic reaction to the fee until they understand that it is financed into the loan and once they see the benefits they get as outlined above (possibilty of 100% financing, 25 year fixed rates, more flexible underwriting criteria, etc.) they can typically get comfortable.
So in a more typical year (without a Pandemic) a small business typically pays what amounts to something similar to a mortgage insurance premium with an SBA business real estate loan, but this fee or premium is temporarily waived for new loans and it is a significant savings.
Full rundown on the 7a: SBA 7a loan requirements
For the SBA 504 there will be no .50% fee charged on the first mortgage and no 1.5% CDC Processing Fee charged on the second mortgage.
Another new pandemic-induced 504 change is the program can now be used to refinance 7a loans.
This is actually a pretty big deal because there are a trememdous number of borrowers who have 7a loans that have rates that are NOT fixed and the 504 program is one of the few commercial real estate loan programs available where you can get a long term fixed rate.
The full details are not yet available for how this will work and it may take longer to get these loans closed due to the way 504 loans are underwritten, but between the waived fees and the ability to get a fixed rate this could give a lot of businesses the option of locking in their overhead for the long haul.
Full 504 loan program info: SBA 504 loan guidelines
6 Months of Payments
Additionally, the SBA is going to make the first 6 months of principal and interest payments up to a maximum of $9,000 per month for new loans that close by September 30 2021.
This is NOT a forbearance and NOT a deferment.
The payments are going to be made by the SBA for the business.
This is a huge positive for anyone applying for a business property loan.
90% SBA Guaranty
The SBA Guaranty for most 7a loans is 75%.
This means the SBA will guarantee 75% of a loan made to small businesses by an SBA lender.
This guarantee is temporarily 90%.
Why should you care?
The 7a program is like the multi-tool of small business lending and can be used for all types of business needs. We primarily help borrowers with business property loans, loans to buy a business or commercial construction loans (including construction loans up to and over 100% loan to cost).
The higher guaranty matters because it reduces the risk for a lender (and lenders are all about risk).
The way the SBA 7a progam works is an SBA lender approves a loan and depending on whether they are authorized by the SBA to approve loans themselves (which is better and quicker for borrowers) they normally get a guaranty from the SBA for 75% of the loan amount, so if a borrower defaults on the loan – and the lender has underwritten it correctly – the SBA will pay the lender 75% of what is still owed by the borrower.
For most of 2021 this guarantee is 90%, so lenders can feel comfortable taking more risk and hopefully approving more loans/helping more businesses as a result.
SBA Loan for Rental Property
However, there are exceptions and they are:
- Self storage loans
- RV & Boat Storage loans
- RV Park Financing
- Hotel Loans
- Assisted Living Facility Financing
- Residential and Adult Care Home Loans
You could argue that in some cases all of the above are more like investment properties than “owner occupied business property” but they are all eligible with some caveats, so if you are looking for an SBA loan for rental property it might be worth getting in touch to discuss.
If you are in the market for a small business real estate loan (or a commercial building loan for a mid-sized business) both the SBA 504 and the SBA 7a have proven to be almost invaluable for many businesses.
Neither loan is perfect (what loan is?), but the current stimulus has made them exceptionally attractive.
The SBA 7a loan requirements are very flexible and these new stimulus provisions should help a lot of small businesses secure not only a commercial building loan, but since the program can also be used for any legitimate business purpose it could help many businesses finance (or refinance) other debt, equipment, inventory, working capital, building renovations, etc.
It is also important to note that the SBA gives lenders some very strict guidelines for certain rules and eligibility, but there is A LOT of room for interpretation by lenders, so if you talk to an SBA lender about financing business real estate or any other SBA-eligible need and they turn you down, do not assume that other lenders will provide the same feedback as they are all slightly different from one another.
These SBA programs are a pretty brilliant innovation that have helped many thousands of small businesses who either could not get conventional bank financing or could not get their banker to give them the terms they thought they deserved.
The programs are typically mostly “borrower funded” by the payments of loan fees, but with the fees temporarily waived and the higher guaranty these programs are dramatically better making now a fairly ideal time to be getting an business real estate loan backed by the SBA.
Questions? jking (at) green commercial capital (dot) com