- The SBA 7(a) loan program is the Small Business Administration's primary way of helping small businesses secure financing. These are the most common types of loans that the SBA guarantees, and the administration guarantees tens of thousands of them each year. While businesses must meet strict criteria to qualify, many small businesses -- including many real estate businesses -- are eligible for SBA 7(a) loans.
SBA 7(a) Commercial Property Loan Highlights
Eligible Properties: Office, Warehouse/Industrial, Mixed Use, Retail, Medical/Healthcare, Self Storage, Hotel/Motel
Loan amount range: Maximum of $5,000,000
Interest Rate: Prime + 2.75%. See LIBROR rates.
Loan Term: Up to 25 years for commercial properties
Maximum LTV: 75% For Loans Over $150,000
Minimum DSCR: 1.25x
Recourse: Typically Full-recourse.
Prepayment: For loans with maturities of 15 years or more if prepaid during the first 3 years. (5% year 1, 3% year 2 and 1% year 3)
Guaranty Fees: Above $700,000=3.5% up to the 1st million: plus .25% on guaranty portion over $1 million.
Collateral: SBA requires that the lender collateralize the loan to the maximum extent possible up to the loan amount on loans over $350,000. Personal guarantees are required for owners that have a 20% or more stake in the business
Advantages of SBA 7(a) Loans
- Availablility: May be available even if other financing options aren’t. The SBA’s guarantee gives lenders more reassurance, so they’re more willing to underwrite these loans.
- Maximum Interest Rates: Set by the SBA, so businesses know they’ll pay a fair and competitive rate.
- Loan Amounts: Available in a wide range of amounts, and they can be underwritten as a traditional loan or a line of credit. Depending on the program, loaned amounts can range from less than $150,000 up to $5 million.
Disadvantages of SBA 7(a) Loans
- Requirements: Businesses must meet the SBA’s eligibility requirements, which often include a credit check. Not all businesses are eligible.
- Prepayment Penalty: Potentially unsuitable in situations where businesses expect to pay off or refinance a loan in just a few years.
- Personal Guarantee: Business owners are still personally responsible for the loans even though the SBA also guarantees a portion of them.
- Approval Process: Although these loans are assumable, the SBA’s approval process for a transfer of ownership makes assuming these loans somewhat cumbersome.
- Adjustable Rate: The most common 7(a) loan is a quarterly adjustable.
What Are SBA 7(a) Loans?
The Small Business Administration doesn’t directly underwrite loans but instead provides guarantees through a variety of programs. The name for the agency’s main program comes from Section 7(a) of the Small Business Act of 1953, which authorized the administration to provide loan guarantees for small businesses in the United States.
The SBA 7(a) loan program actually consists of multiple loan guaranty programs that are authorized under Section 7(a). Not all of these programs are available to real estate businesses, but several of the more notable individual programs are.
The primary individual program that’s of interest to real estate businesses is the SBA Standard 7(a) Loan. Other programs that may be helpful are the SBA 7(a) Small Loan, the SBA Express Loan, the SBA Veterans Advantage, and the SBA CAPlines. (The SBA Express Loan is different from the SBA Export Express, which is only for export businesses.)
What Commercial Properties Are SBA 7(a) Loans Well Suited For?
SBA 7(a) loans can be used for long-term working capital, short-term working capital, purchasing equipment, acquisitions, and -- most important to real estate businesses -- constructing or renovating buildings. With regard to buildings, any business-owned buildings are eligible. These loans can provide financing for office buildings, shopping centers, hotels, and mixed-use projects where the owner occupies more than 51% of the property.
Additionally, SBA 7(a) commercial real estate loans may be used to finance distressed properties. Because the loans are guaranteed by the Small Business Administration, lenders may be more willing to underwrite one for a property that’s not really suitable collateral.
The advantage of 7(a) program over the 504 is when a sale of a business is combined with a sale of commercial property and working capital is needed. As SBA forbids financing a business purchases or working capital under the 504 guidelines.
What Terms Do SBA 7(a) Loans Offer?
The most common SBA Standard 7(a) Loan provides eligible businesses with substantial access to funding. These loans can be underwritten for up to $5 million and have maximum maturities of 25 years. The SBA sets maximum interest rates, but borrowers and lenders are allowed to negotiate lower rates. The SBA will guarantee up to 85 percent of the loan’s value for loans as high as $150,000, and 75 percent for loans over $150,000.
SBA Express Loans act as lines of credit, which can be helpful when completing a building or renovation project. These are available for up to $350,000, of which the SBA will guarantee as much as 50%. The loan duration can be up to 7 years. A notable benefit, the SBA will respond to applications for this type of loan within 36 hours.
CAPLines also function as lines of credit, and there are four types of CAPLines available. The most relevant to real estate is the Contract CAPLines and Builders CAPLines, although both are normally purchased by contractors rather than investors. These lines of credit last for up to 10 years or 5 years (for Builders CAPLines).
The SBA’s Veteran’s Advantage doesn’t offer a specific loan type but is rather a fee-reducing benefit that can be applied to any other SBA loan program. The majority of veteran-owned businesses can apply for this after applying to their desired loan program.
What Features Do SBA 7(a) Loans Come With?
SBA Guaranty: The main feature that all SBA 7(a) loans come with is a guarantee from the Small Business Administration. The guarantee ensures that lenders will recoup some of the loan amounts if a borrower defaults, and that will make lenders more willing to approve loans. In order to obtain a loan, businesses must work with an SBA-approved lender.
Maximum Interest Rate: Since the SBA sets maximum interest rates for each of these loan programs, businesses know that their loans will come with fair rates. These loans are intended for situations where businesses can’t secure affordable and reasonable financing without assistance, and many businesses that are in such situations would otherwise pay extremely high-interest rates.
Prepayment Penalty: Businesses should be aware that all SBA 7(a) loans come with prepayment penalties. The penalty time frame, amount, and structure vary among individual Section 7(a) programs.
Loan Assumption: SBA 7(a) loans are assumable, so long as the purchasing business meets the SBA’s eligibility requirements. Transferring one of these loans to a purchasing business requires going through an approval process with the SBA.
Personal Guaranty: Although the SBA guarantees these loans, all Section 7(a) loans require a personal guaranty by anyone who owns 20% or more in the business.