The Small Business Administration (SBA) offers support and assistance to small businesses across the country through a variety of programs, including loans that can be used to invest in, among other things, real estate.
One such program is the SBA 7a, which helps small businesses borrow up to $5-million. How does the SBA 7a loan program work, and can you use one to grow your real estate investment business? Let’s explore what an SBA 7a loan is and how to qualify.
1. What is an SBA 7a Loan?
The SBA runs many programs to support small businesses, including a variety of loan programs. Its most commonly used loan program is the SBA 7(a) loan which allows small businesses to access up to $5-million to use for working capital, refinancing, and purchases including real estate. Because SBA 7(a) loans are backed by a federal agency, they’re easier to qualify for than conventional loans in some situations.
2. How Do I Qualify for an SBA 7a Loan?
To qualify for an SBA 7(a) loan, you need to meet a few requirements. You must be a small business operating for profit within the United States, have your own equity to invest, and use alternative financial resources including personal assets before applying for a loan.
You’ll also need to meet SBA criteria for how the loan will be used. If you’re using the loan to purchase property, a majority of the property in question must be used to carry on business other than a real estate investment. That means you can’t use an SBA 7(a) loan to buy a rental building. You could, however, potentially use an SBA 7(a) loan to purchase a property for another business with the intention of renting out a portion of it. At least 51% of an existing property must be owner-occupied, and at least 60% of new construction must be owner-occupied to qualify for an SBA 7(a) loan.
You could not, for example, use an SBA 7(a) loan to purchase a 2-unit property with the intention of using 51% as your personal office and rent out the rest. You could, however, use 51% to operate a pet store and rent out the rest.
Additionally, you and your business must have reasonable owner equity to invest and meet minimum FICO score requirements.
3. How Do I Apply for an SBA 7a Loan?
SBA 7(a) loans are offered through local lenders who participate in the SBA loans program. Working with your lender, you’ll need to submit a borrower information form, personal and business financial statements, tax returns, and business documentation. Make sure your rental property bookkeeping is in good order.
You’ll also need to provide details about the property you’re using as collateral if it’s different from the property you’re purchasing.
4. What Types of SBA 7a Loans Are There?
The SBA offers multiple types of SBA 7(a) loans to meet the needs of different small businesses. The SBA 7(a) loans that can be used to purchase real estate include:
- SBA 7(a) Standard: Borrow up to $5-million amortized for up to 25 years.
- SBA 7(a) Small Loan: Borrow up to $350,000 amortized for up to 25 years.
- SBA 7(a) Express Loan: Borrow up to $500,000 amortized for up to 25 years with an accelerated approval time of 36 hours.
- SBA 7(a) Builders CAPLine: Access a line of credit up to $5-million for working capital to build or renovate a property for up to 5 years.
Types of SBA 7a Loans at a Glance
| Loan Type | Maximum Loan Amount | Maximum SBA Guarantee % | Loan Type | Maturity for Real Estate | Real Estate Eligible |
|---|---|---|---|---|---|
| Standard 7(a) | $5-million | 85% for loans up to $150,000 and 75% for loans greater than $150,000 | Installment | 25 years | Yes |
| 7(a) Small Loan | $350,000 | 85% for loans up to $150,000 and 75% for loans greater than $150,000 | Installment | 25 years | Yes |
| SBA Express | $500,000 | 50% | Installment | 25 years | Yes |
| CAPLine | $5-million | 85% for loans up to $150,000 and 75% for loans greater than $150,000 | Revolving | 5 years | Construction and renovation only |
| Export Express | $500,000 | 90% for loans of $350,000 or less, 75% for loans more than $350,000 | Installment | N/A | No |
| Export Working Capital | $5-million | 90% | Installment | N/A | No |
| International Trade | $5-million | 90% | Installment | N/A | No |
5. SBA 7a Loan Rates and Terms
Interest rates on SBA 7(a) loans depend on the amount you’re borrowing and the loan’s amortization period. Interest rates range from Base + 2.25% to 8.0% and fees start at 2% of the guaranteed portion of the loan.
SBA 7(a) Loan Rates and Fees at a Glance
| Loan Amount | Max Rate (variable, < 7 years) | Max Rate (variable, > 7 years) | Max Rate (fixed) | Fees |
|---|---|---|---|---|
| $25,000 or less | Base + 4.25% | Base + 4.75% | 8.0% | 2% of guaranteed portion |
| $25,000 to $50,000 | Base + 3.25% | Base + 3.75% | 7.0% | 2% of guaranteed portion |
| $50,000 to $150,000 | Base + 2.25% | Base + 2.75% | 6.0% | 2% of guaranteed portion |
| $150,001 to $250,000 | Base + 2.25% | Base + 2.75% | 6.0% | 3% of guaranteed portion |
| $250,000 to $700,000 | Base + 2.25% | Base + 2.75% | 6.0% | 3% of guaranteed portion |
| $700,000+ | Base + 2.25% | Base + 2.75% | 6.0% | 3.5% of guaranteed portion up to $1-million plus 3.75% of guaranteed portion over $1-million |
The bottom line: An SBA 7a Loan Might Be for You – If the Circumstances are Just Right
As a real estate investor, financing is sure to be one of your biggest expenses. So, it’s important to get it right. SBA 7(a) loans are one of many choices you have for financing a rental property, but it only makes sense in some situations. Namely, if you’re investing in real estate for use by a different type of business and have an opportunity to acquire a property that can provide supplemental income as a rental.
FAQs
You can apply for an SBA 7(a) loan as long as you are a small business operating within the United States, have equity to invest, and aren’t eligible for similar financing from other sources. If you’re using an SBA 7(a) loan to purchase real estate, you must buy it through a business that does something other than real estate investing and use at least 51% in service of running that business.
The SBA 7(a) loan is one of many rental property financing options, but it may not be the best choice because real estate investment firms are not eligible for SBA 7(a) loans. However, it may make sense to apply if you want to purchase property for another kind of business and have an opportunity to rent a portion of it. Learn more about your rental property financing options in our article on what kind of loans you can get to buy a rental property.
You can ask your preferred bank if they participate in the SBA 7a loan program or use the SBA’s lender match tool to find lenders throughout all 50 states and US territories. You can also learn about other financing options in our rental property loans marketplace.
