SBA Financing for Real Estate: A Strategic Approach for Investors

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When seeking funding to finance a real estate business, your first instinct may be to turn to your savings. But depending on how ambitious the project is, your savings may not suffice. Your next best option would be to obtain an SBA loan.

SBA loans provide numerous benefits over traditional business loans. Read below to uncover how to leverage this funding option to scale your real estate venture to new heights.

Introducing SBA Loans

A Small Business Administration (SBA) loan is a business loan guaranteed by the United States Small Business Administration. This independent federal agency provides support for small businesses.

SBA loans are strictly business loans. That means you can only use them to fund business-related (as opposed to personal) expenses.

Most real estate investors use SBA loans as startup capital. The SBA loan for real estate may also go into funding ambitious purchases, covering overheads, and expanding your venture.

How to Leverage SBA Financing for Real Estates

1. Understand Its Benefits

There are many business loans you can secure for your real estate company. So, why consider SBA loans instead?

SBA loans typically provide higher lending amounts and lower interest rates than traditional business loans. The interest rates are generally capped at 4.75%.

SBA loans also come with reasonable repayment schedules. You’ll have up to ten years to repay the loan if you intend to use it for working capital, equipment purchase, or inventory management. The repayment period for real estate SBA loans is up to 25 years.

From a lender’s standpoint, SBA loans are low-risk loans because a state agency guarantees them.

2. Know the Potential Drawbacks Too

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There are a few downsides to SBA loans for real estate as well. Notably, these loans usually have strict eligibility criteria.

SBA loans are almost always collateralized. Besides, your real estate venture must have been around for a few years and generated solid income to qualify for the funding.

SBA loans also require an unconditional personal guarantee from all company stakeholders with a minimum ownership of 20%. Such individuals will collectively be responsible for repaying the loan if the principal borrower defaults. Factors like your debt-to-income (DTI) ratio, credit score, and the collateral value at your disposal will also come into play before a lender can advance an SBA loan to you.

It’s also important to note that while the U.S. Small Business Administration guarantees SBA loans, independent lenders offer the funding, which may disqualify you based on their risk assessment. And since multiple parties are involved, SBA loans can take up to three months to process.

3. Define Your Real Estate Funding Needs

You’ve probably weighed the perks and drawbacks of SBA loans, and then have decided to go ahead and pursue this funding model. Before you do, it’s best to define your real estate funding needs.

Are you looking for an SBA loan to start a new real estate venture or to scale your existing business? Or perhaps you need a loan to consolidate your debts, purchase new inventory, or manage unforeseen business expenses?

Whatever the case may be, ensure you utilize the funds for the intended purposes.

4. Familiarize Yourself with the Working of SBA Loans

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SBA loans work in a more or less similar manner to other types of business or home loans.

The general process begins with finding a potential lender and getting prequalified for the loan. The next step is to apply for the SBA loan and use the advanced amount to fund your real estate venture. Finally, you repay the loan according to the agreed terms.

In the unfortunate event that you’re unable to repay your SBA loan, the SBA agency will repay your lender and then you (alongside any personal guarantors) must repay the SBA. Expectedly, there are penalties to contend with.

5. Determine If You Qualify

Your eligibility for an SBA real estate loan depends mainly on the type of SBA loan you’re applying for. Note that SBA loans are available through the 504 and 7 (a) loan programs.

504 loans are primarily intended for capital-intensive real estate asset purchases. Common ways to utilize the funds include land or building purchases, land and building improvements, equipment and machinery purchases, and debt refinancing.

On the other hand, 7 (a) loans can be used to fund various needs.

To qualify for either loan, you must satisfy the following conditions.

Be a small business within the framework of SBA
Be a for-profit real estate venture
Be based and doing business in the United States
Have a solid credit score (aim for 690 or higher)
Have been in business for at least two years
Have generated considerable income

There may be additional requirements based on the SBA’s policies and your lender.

6. Apply for the Loan

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One noteworthy drawback to SBA loans, besides their strict eligibility criteria, is their detailed application process.

First, you’ll need to find an SBA-approved lender. Then, fill out the relevant forms and avail the requisite documentation. Among the information you’ll need to provide include your personal and business financial statements, personal and business tax returns, business license, and lease agreement where applicable.

Your application may take up to three months to be processed.

Wrap Up

Small Business Administration loans are an excellent funding option for small real estate ventures. However, it’s important to understand all the perks and potential downsides before opting for SBA real estate loans.

Author Profile

Manuela Willbold: Blogger and Educator by Passion | Senior Online Media & PR Strategist at ClickDo Ltd. | Contributor to many Education, Business & Lifestyle Blogs in the United Kingdom & Germany | Summer Course Student at the London School of Journalism and Course Instructor at the SeekaHost University.