Real Estate Loans: How They Work and Why You Might Benefit From Them

Whether you need warehouse space to create a product or an office building to meet with clients, purchasing real estate is often a large part of the process when starting a new business. Real estate loans can be hard to come by, but the Small Business Administration may make it easier.

How They Work

The Small Business Administration collaborates with approved lenders and guarantees loans for at least 75 percent, which means it will pay that amount if you default on the lend. This means more lenders are willing to finance small business and more small business owners receive financing.

Commercial real estate loans are available in two configurations. The Certified Development Company/504 Loan Program offers 10- or 20-year repayment terms with interest rates of 4.08 percent or 4.83 percent, respectively. Financing ranges from $125,000 to more than $20 million in most cases. The recipient can use it to buy existing buildings, buy land and construct new buildings, purchase large machinery or refinance debt.

The second configuration is the 7(a) loan program. This loan is general and is useful for more than purchasing real estate or machinery, although the funding does need to go toward business operations in some way. The SBA 7(a) loan provides as much as $5 million, with the average amount being just under $340,000. Borrowers can take up to 25 years to pay back the loan, but they must also provide a down payment equal to at least 10 percent. The interest rate is also higher at about seven percent. Still, this option is good if you need to purchase inventory, provide working capital, buy smaller equipment and so on.

Benefits of SBA Loans

Securing financing through the Small Business Administration can be a lengthy process, but it’s an excellent choice if you don’t qualify for real estate loans through a traditional bank. Keep in mind that banks often require companies to have been in business for a few years and have a credit score of at least 700, which means the SBA is the best choice for most small business startups. Other advantages include long repayment periods, financing of up to 90 percent of costs and lower down payment requirements than some traditional banks. In addition, SBA loans have an interest rate cap to keep lenders from continuously asking for higher rates.

Even though the SBA works to ensure borrowers receive legitimate real estate loans, it is still important to do your research. Read the fine print of any offer before signing on the dotted line to ensure you don’t find yourself paying unexpected fees in the future. Taking your time when selecting a lender ensures you make the right choice.

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