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What Is an SBA 7a Loan and How Can Real Estate Investors Use It?

The SBA 7a loan program can be a great long-term financing option for commercial investors. Learn how the loan works, who's eligible, and how it applies to real estate.

[Updated: Feb 04, 2021 ] Jun 26, 2020 by Liz Brumer
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A crucial part of finding success in commercial real estate (CRE) investing is knowing your loan options before acquiring, expanding, or building your next project. While there are several financing programs available to CRE investors, the SBA 7a loan can be a great long-term loan to help purchase, build, or expand an existing commercial investment. Learn how the SBA 7a loan program works, including who's eligible, and how real estate investors can use the 7a loan.

What is the SBA 7a loan program?

An SBA 7a loan is a loan issued through a preferred lender, such as a bank that specializes in SBA lending, and is guaranteed by the U.S. Small Business Administration (SBA).

The preferred SBA lender provides the funds for a portion of the loan with the remainder having an SBA guarantee. That means if the borrower defaults on the loan, the SBA will pay up to the guaranteed amount. There are several loan programs that fall under the SBA 7a, including:

  • Standard 7a.
  • 7a small loan.
  • SBA Express loan.
  • Export express loan.
  • Export working capital loan.
  • International trade loan.

The interest rate, loan term, prepayment period, down payment requirement, and the maximum loan amount will vary based on the loan program being used.

How real estate investors can use a 7a loan

While the SBA was designed to help small business owners, real estate investors can benefit from an SBA loan for a variety of projects:

  • Purchasing an existing commercial building.
  • Expanding a current commercial property.
  • Ground-up construction.

The most common SBA loan program for real estate is the standard 7a loan, which is a long-term loan providing financing for up to 25 years. Some 7a loans are fixed rate, although most interest rates for real estate are variable. Loans higher than $50,000 are base rate (tied to the LIBOR) plus 2.75% and typically adjust on a quarterly basis.

The biggest benefit of going with an SBA loan, such as the 7a for real estate, is the low down payment requirement, which ranges between 10%-15%, not to mention that fact that it's a long-term loan. This means the investor can secure a relatively low interest rate amortized over a long period of time, removing the obstacles of having to sell or refinance to pay off a shorter-term balloon loan that's more commonly used in traditional commercial loans.

The 7a loan can also include working capital to cover negative cash flow or cost for improvements while you expand, construct, or stabilize the property, which makes it a great option for a value-add commercial investment.

Who is eligible for an SBA 7a loan?

Real estate investors who own existing commercial property or are working on a new acquisition in the U.S. or its territories can apply for a 7a loan through a preferred lender, up to a maximum loan amount of $5 million.

Most SBA loans are asset based, meaning the current performance or potential performance of the property weighs heavily on the loan approval. While the property is the main priority, borrower credentials also play a role in whether a loan is approved or denied or if additional terms, such as pledging collateral, are required in order to qualify. The lender and SBA will review the borrower's:

  • Credit score.
  • Debt-to-income ratio.
  • Real estate and business experience.
  • Net worth.
  • Personal contribution (how much money and ownership you have or are putting into the business).

Things to consider before getting a 7a loan

While SBA loans can be a great way to finance a commercial investment, there are drawbacks; the first of which is fees. The SBA charges a guarantee fee, which ranges from 2%-3.5% depending on the size of the loan, which is charged in addition to any lender fees and closing costs, meaning the up-front cost for this loan can be higher than other financing programs. The application and underwriting process can also be lengthy, taking anywhere from four to eight weeks to finalize. If you're looking for financing quickly, you may want to look at alternative options first.

But in general, an SBA 7a loan can be a great option for financing your real estate investments. It's a good idea to find a qualified and experienced SBA-preferred lender and establish a relationship with them before you need financing. Find out exactly what paperwork is needed and what the process is like so you'll be prepared when the time comes to apply. Ask if there are other collateral requirements, such as your personal home or other investment properties, and find out if other financing programs will work better for you based on your needs.

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