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:
- 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.
- 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.
- The borrower/small business owner contributes 10% to the loan as down payment.