What Is a Small Business Real Estate Loan and How to Apply For One
Purchasing real estate is not a small investment, but it certainly is a good one as the real estate prices keep going up. The vast majority of business owners are not in a position to invest huge sums of money for a parcel of the desired land, nor do they have means of getting the capital.
If you want to invest but do not have the means to do it, you should look into small business real estate loans. In this article, we will identify the best small business loans for purchasing real estate and:
What Are Small Business Loans?
Small business loans provide owners with capital that can be used on purchasing equipment, covering startup costs, or anything else that they do not have the budget for. Before you decide to apply for one, you should look into different types of loans to find one that best suits your business’s needs.
Small Business Loans for Real Estate
The most important step in borrowing money for real estate is choosing the adequate loan type. One of the best loan options for purchasing real estate is the Small Business Administration (SBA) loans. SBA loans are government-backed loans that help borrowers enjoy lower interest rates and have better terms. The SBA offers two types of loans that are suitable for real estate purchases:
- SBA 504 loan
- SBA 7(a) loan
SBA 504 Loan
The SBA 504 loan can be used for the construction or purchase of:
- Existing land or building
- New facilities
- Long-term machinery and equipment
You can also use the 504 loan for the improvement of land, streets, parking lots, and more, and you cannot use it for:
- Working capital
- Repaying debt
- Investing in rental real estate
This type of loan is available through Certified Development Companies (CDCs) and the SBA’s community partners and banks that regulate non-profit organizations and promote economic development. To qualify for the SBA 504 loan, you must:
- Have a tangible net worth that is not over $15 million
- Operate as a for-profit company in the U.S.
- Have an average net income of less than $5 million after two years upon filing your application and federal taxes
The interest rate for the 504 loan depends mainly on the repayment term. For more details, consult the table below:
The SBA 7(a) loan is the most commonly sought-after program for startups and the best option for real estate purchases. You can also use it for:
- Increasing working capital
- Refinancing business debt
- Purchasing fixtures, furniture, etc.
- Constructing new buildings or renovating existing ones
- Establishing a new business or assisting in the acquisition of an existing ones
The biggest amount of money you can borrow through this program is $5 million, which should be enough to cover your expenses. To be eligible for the 7(a) loan, you must:
- Operate for profit
- Have a high credit score
- Be considered a small business
- Have reasonable invested equity
- Be engaged in business in the U.S.
- Demonstrate a need for a loan
- Use alternative financial resources (e.g., personal assets) before seeking financial assistance
- Use the funds for a business purpose
- Not have any existing debt obligations to the U.S. government
Most 7(a) loans can be repaid with monthly payments and interest. The rate is around 2%, and you can require a different payment amount when it changes.
To apply for a real estate loan, you will need to gather the required documentation and file it with the lending institution. Among the paperwork you need to prepare are:
- The borrower information form
- Background and financial statements
- Business financial statements
- Ownership and affiliations
- Loan application history
- Business license
- Income tax returns
- Business lease
- Business history and overview
- Loan request letter
One of the most important documents that you will need to get is the loan request letter. It contains the details about you and your business, and the lender uses it to determine whether to approve your application or not. If you want to ensure that you get a supreme loan request letter, use DoNotPay! We will generate this document for you in no time and make sure it fits your needs perfectly.
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- Find our Business Loan Request Letter tool
- Prepare your financial statements
- Answer our chatbot’s questions
- Upload the gathered documents
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