Can an SBA Loan be used to Buy Real Estate?

As the name implies, SBA (Small Business Administration) loans are geared to small businesses looking for an affordable and accessible way to obtain financing for their business. SBA loans come with attractive terms and are typically much better deals than conventional loans. What may be lesser known however, is how an SBA loan can be used. We often hear the question, can an SBA loan be used to buy real estate?  

The answer is simple – yes. 

The SBA 504 Loan was specifically designed to help growing small businesses expand by purchasing fixed assets such as real estate. The biggest stipulation is that the real estate must be used by the business, a rule enforced to uphold the integrity of the program. A business must occupy at least 50% of the building in order to qualify for the 504 program, or 60% for newly constructed buildings. Most businesses that operate for-profit are eligible as long as they plan on occupying the building. 

While real estate is the most common use of the 504 loan, it can also be used to: 

  • purchase land or buildings 
  • construct, upgrade or renovate buildings 
  • purchase equipment with a service life of ten years or more 
  • refinance conventional debt 

The SBA 504 Loan Structure 

The 504 loan program partners a nonprofit Certified Development Company (CDC) like TMC Financing with a conventional lender to provide a loan in three parts: 

  1. First mortgage from a conventional lender for at least 50% of the total project amount. The amount and conditions of that loan are determined separately. TMC can help match a borrower with the perfect banking partner for this loan, if desired.
  2. The CDC facilitates a separate SBA loan of 40% of the total, up to $5 million, at a fixed, below-market rate. Manufacturers or projects that implement green efficiencies can receive up to $5.5 million. This is the second mortgage. 
  3. The borrower/small business owner contributes 10% to the loan as down payment. 

This 50-40-10 structure is the most common scenario however, certain instances may require a 15 percent down payment from the borrower, such as if the business is a start up or if the property being acquired is deemed a single use property. 

The low down payment is one of the biggest attractions to the program. With the loan’s low injection, businesses retain precious working capital for operational costs. Renovations and soft costs can also be financed, allowing for further cash savings. The 504 loan also has a long term of up to 25 years, fully amortized so there are no balloon payments. 

Why Purchase Real Estate? 

Purchasing real estate for your business with an SBA loan is a smart, savvy move for a business owner. There are many benefits to both the owner as well as the business.  

Gain stability and peace of mindBusiness owners can operate knowing that they will never get priced out of their building. Purchasing real estate protects business owners against rent increases or displacement that may result from rising property values and greater competition on the real estate market. 

Gain EquityEquity that comes from buying real estate can be monetized to fund further expansion of a business, or can be used towards a retirement strategy. Small business owners are primarily concerned with growing their business and tend to put most of their earnings back into the business, rather than pay themselves a big salary or save for their own future. Renting out your building, or selling it, once you retire, can provide a substantial nest egg for retirement.   

Benefit from improvements. Most business owners need to update or upgrade the space they occupy. With renting, your landlord gets to reap those benefits. Own the building and your investments positively impact you, not your landlord.  

Learn More 

You can find out more about using the 504 loan from one of TMC Financing’s 504 loan experts. TMC is an SBA Premier Certified Lender and a high-volume loan provider. With over 35 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.