SBA Loans for Real Estate Development & Construction

Real estate and construction are two of the most expensive costs of being a small business owner. Whether you're building a business from the ground up or expanding operations, you're going to need money before you start making money-and a lot of it.

Fortunately, there's financing available to fund hefty expenses like these. You might be thinking a commercial mortgage (or commercial real estate loan) is your best bet, and you're not far off. A commercial mortgage is an excellent way to finance purchasing, building, or renovating-but there's one better: an SBA loan.

What is an SBA loan?

The Small Business Administration (SBA) offers various government-backed loans to provide small businesses with top-notch funding. The government doesn't do the actual lending-they just guarantee up to 85% of the funds to mitigate risk to lenders.

While SBA loans and commercial mortgages can be used in quite a few of the same ways, SBA loans have a slight advantage, especially when it comes to financing a major purchase like real estate development and construction. 

Here's why SBA loans are your best option:

• Flexible spending: Can be used on expenses beyond real estate and construction, like equipment and working capital.
• High maximum loan amounts: Loan maximums are up to $5 million (and even $5.5 million for some projects).
• Low interest rates: SBA 7(a) and 504 loans provided some of the lowest fixed interest rates you'll see, and you won't have to worry about prime lending rates going up over time.
• Long repayment terms: Loans on real estate can be as long as 25 years.
• Minimal down payment: 504 loans only require a 10% down payment, while most commercial mortgages require 20% to 30% down.

Because the government guarantees these loans, lenders are willing to lend larger amounts to small businesses. You'll still need a great credit score and usually at least two years in business to qualify, but then you'll be in a much better position to secure top-notch financing. 

How to use SBA loans for real estate development and construction

SBA loans can be used on various real estate expenses. Here are a few ways you can use these loans to finance your big-time land and construction purchases:

• Buy land: Purchase the plot where you're going to build your office, warehouse, or other facilities.
• Improve land: Landscape, grade, or add parking lots.
• Construct buildings: Build new buildings from the ground up.
• Renovate existing facilities: Improve your existing structures with substantial upgrades.
• Buy furniture, lighting, and supplies: Furnish your buildings with the right necessities.
• Purchase long-term machinery: Buy those long-lasting assets like manufacturing equipment or highly calibrated machines.

Thanks to SBA loan's long repayment terms and large lending amounts, they're perfect for financing expensive real estate and construction costs. Everything from the repayment terms to the interest rates helps reduce your monthly payments, so these hefty expenses don't eat too much out of your working capital.

Types of SBA loans that can be used on real estate and construction

• SBA 7(a) Loans
• SBA Express Loans
• SBA 504 Loans

SBA 7(a) loans

SBA 7(a) loans are the most popular type of SBA loan. They cover the most extensive list of costs and have a maximum loan amount of up to $5 million. Repayment terms can be as long as 25 years for real estate loans.

The average minimum credit score requirement is 640 with a 10-30% down payment. Most SBA 7(a) loans require collateral, but your real estate purchases can almost always double as collateral, too.

SBA 7(a) loans pros and cons

Pros:

• Versatile
• Large loan maximum
• Low interest rates
• Up to 25-year repayment terms

Cons:

• Lots of paperwork
• Lengthy application process
• Difficult to qualify

SBA 7(a) Express loans

SBA Express loans are exactly what they sound like-fast loans. These loans have lower loan maximums (up to $500,00) and shorter repayment terms. Plus, the government usually only guarantees up to 50% of these loans.

SBA 7(a) Express loans pros and cons

Pros:

• Faster turnaround time
• Same covered expenses as standard 7(a)
• Loans up to $350,000

Cons:

• Shorter repayment terms
• Higher interest rates
• Still not a "quick" process

SBA 504 loans

CDC 504 loans are funded by two separate lenders: a lender (bank, credit union, alternative lender) and a Certified Development Corporation (CDC). Both of these lenders will bring different terms, fees, and rates to the table, and these combined will be your terms for your 504 loan.

These loans have maturity rates of up to 25 years and loan maximums of up to $5.5 million. You'll usually only need a 10% down payment on 504 loans, which makes them a much better choice for businesses who might not be able to afford 20-30% of an SBA 7(a) loan's down payment.

SBA 504 loans pros and cons

Pros:

• Large loan amounts
• Long repayment terms
• Low down payments

Cons:

• Less versatile covered costs
• Lower SBA guarantee