The Small Business Administration (SBA) plays a key role in launching the growth of small businesses. Among their suite of programs, SBA construction loans stand out as a valuable resource for businesses wanting to expand. These loans not only provide you with the working capital to purchase land or a new building for your business, but they can also be used for practically any other business expense such as a renovation to your storefront, new kitchen equipment for your restaurant, or even the money you need to hire more staff.
In this article, we will be exploring the common types of SBA loans and how to use them. Keep on reading to learn how they can benefit you!
What is an SBA construction loan?
An SBA loan is a financing solution extended by private lenders but backed by a partial guarantee from the government. This guarantee lowers the risk for lenders, prompting them to provide better terms and rates, thus allowing businesses to secure capital that might otherwise be out of reach.
SBA loans have a slight advantage over conventional commercial loans, especially for major expenses such as real estate development and construction. Let’s take a quick look at their benefits:
- Flexible Spending: Suitable for a wide range of expenses including equipment purchase.
- High Maximum Loan Amounts: They can stretch up to $5 million, with some projects eligible for $5.5 million.
- Competitive Interest Rates: Both SBA 7(a) and 504 loans boast highly competitive fixed interest rates.
- Extended Repayment Terms: For real estate loans, the repayment window can expand up to 25 years.
- Minimal Down Payment: While most conventional commercial loans require a down payment between 20% to 30%, 504 loans only require a 10% down payment.
Types of SBA loans
This is the most popular SBA loan, offering coverage for a broad range of business expenses for up to $5 million. For property expenditures, the repayment can extend to 25 years.
To be approved, you need a credit score of 640+ and a down payment of 10% to 30%. Additionally, most borrowers need to provide collateral, but the property being financed can generally serve this purpose.
Advantages of SBA 7(a) loans:
- High maximum loan amount.
- Competitive interest rates.
- Long repayment terms, up to 25 years.
Disadvantages of SBA 7(a) loans:
- A lot of documentation is required.
- Time-consuming application process.
- Difficult to qualify.
SBA 7(a) Express Loans (Microloans)
As the name suggests, these are expedited loans. However, they come with a lower borrowing limit (maxing out at $350,000) and a shorter repayment period. Also, the government’s guarantee will only cover up to half of the loan amount.
Advantages of SBA 7(a) Express loans:
- Faster processing.
- Covers similar expenses as the standard 7(a) loans.
- Offers loans up to $350,000.
Disadvantages of SBA 7(a) Express loans:
- Reduced repayment terms.
- Higher interest rates.
- Despite being “express”, it’s not instant.
SBA 504 Loans (CDC 504 Loans)
These loans involve collaboration between two lenders: a traditional lender, such as a bank or credit union, and a Certified Development Corporation (CDC). The terms, rates, and fees from both entities will define the overall terms of the 504 loan.
They can offer up to $5.5 million with a potential repayment term of 25 years. Typically, a down payment of 10% is required, making it more accessible for businesses that struggle with the 20-30% downpayment of a 7(a) loan.
Advantages of SBA 504 loans:
- High loan ceilings.
- Extended repayment plans.
- Relatively lower down payment requirement.
Disadvantages of SBA 504 loans:
- More restricted usage of funds.
- Lower SBA guarantee.
- Time-consuming application process.
Who should consider an SBA construction loan?
The ideal SBA construction loan applicant is a business owner who has been leasing their operational space for a while and now aspires to own the building they work out of. Their objectives might include:
- Purchasing their rented building and refurbishing it.
- Acquiring a new building and renovating it to meet their needs.
- Embarking on a ground-up construction endeavor on new land.
- Expanding existing facilities on their owned property.
Common characteristics of businesses seeking SBA loans are if they have outgrown their current workspace and are looking to expand, or if they are not ready for substantial repayments typically associated with conventional loans.
These loans offer a golden ticket to funds dedicated to specific construction goals, presenting a chance to amplify operations, enrich cash flow, and drive business growth.
How to use SBA loans for real estate development and construction
SBA loans are a great option to fund a variety of property-related expenses:
- Land Acquisition: Purchase the land where you’re going to construct your building/business.
- Land Enhancement: Undertake landscaping activities, leveling, or establish parking areas.
- Building Construction: Build new buildings.
- Renovations: Upgrade and modernize current buildings.
- Furnishing and Setup: Furnish your space with essential lighting and other supplies.
- Long-term Machinery Purchase: Purchase durable machinery.
They are ideal for covering high property and construction costs, and their favorable repayment conditions and competitive interest rates help maintain manageable monthly payments.
SBA loans are an exceptional tool for new businesses and/or business operations. If your venture aligns with the prerequisites for an SBA loan, we encourage you to get the ball rolling on the application process, speeding up your growth process.