When it comes to securing a commercial real estate loan for your firm, there are many options to look at. From choosing a lender and determining the loan amount to negotiating the loan terms and closing the deal, the path to commercial funding can be rather baffling.
Buying or building an office space is a big ticket expenditure, and a loan for the same could have a repayment period which could span out over years. You cannot afford to leave any stone unturned because you will have to live with your decision for years to come.
Some popular alternatives opted by many business owners are the loan programs offered by the Small Business Administration (SBA). It has framed many loans which aim to provide continual support exclusively to small businesses. Let us take a look at the six types of loans it offers: -
1. SBA 7(a) Loan
2. CDC/SBA 504 Loan
3. SBA CAPLines (Line of Credit)
4. SBA Export Loan
5. SBA Microloan
6. SBA Disaster Loan
Since we are on the subject of purchasing commercial estates, our discussion gets narrowed down to the first two types, as borrowers cannot use the proceeds from the rest to purchase fixed assets. Let us take a closer look at them.
· SBA 7(a)
When someone talks about SBA loans, they usually refer to the 7(a). It is the most availed loan program by corporate houses.
These loans can be availed by startups as well established small businesses. In order to be eligible for the credit, you will need:
* A decent credit score (over 680 is ideal);
* No recent tax liens, foreclosure, or bankruptcies;
* 10% down payment in case you use it to purchase business, commercial real estate, or equipment;
* While the SBA is usually okay with insufficient collateral, lenders do not feel the same way and turn down applications for the same. Loans under $25,000 do not need any collateral.
As far as startups go, they need to meet the same requirements and demonstrate their industry experience to the lender. Usually, it is only the stellar borrowers (with a credit score over 700, good net worth, and real estate with healthy equity) who manage to get approved as a startup.
In addition to the credit requirements, there are a couple of eligibility requirements as well which includes:
* Qualify as a small business in accordance with the SBA.
· Less than 500 employees;
· Average annual revenue below $7.5 mil (for the past 3 years);
· Average net income less than $5 mil (post taxes, excluding previous losses);
· Tangible Assets no more than $15 mil.
* Be a For-profit business which operates primarily in the U.S.
* Use alternate resources (like personal assets) before pursuing financial assistance.
* Be able to validate a requirement for the loan proceeds.
* No bankruptcies or defaults on any prior SBA loan.
* Not delinquent on any debt to the government (including student loans and taxes).
Loan Amount, Interest Rate, & Repayment Term
When the proceeds from SBA 7(a) are intended to be used as commercial property loans, then you can expect:
> An interest rate ranging around 5.75%-8.25%. It usually depends on the likes of credit score and repayment period.
> While the 7(a) is capped at $5,000,000, SBA has not specified a lower limit. However, most lenders do not consider loans under $30,000.
> SBA decides the maturity period according to the projected use of funds. The most common maturity period is 7-10 years but when purchasing commercial property, even 25 years is available.
Use of Loan Proceeds
The proceeds from a 7(a) can only be used for:
* Working Capital
* Debt Refinancing
* Purchasing Equipment
* Buying Commercial Real Estate
* New Construction
* Leasehold Improvements
* Furniture and Fixtures
* Acquiring Business
* Purchasing Franchise
… And much more!
That’s all for now. We hope it cleared the air around SBA 7(a) loans. In our next blog, we will be taking up CDC/SBA 504. If you are interested in 7(a) or any other type of commercial loan, then share your requirements with us. We are the top commercial property loan provider in Rancho Cucamonga, CA. Our loan terms are undoubtedly second to none!