Question 1

What does "owner-occupied" mean in commercial real estate?

Accepted Answer

Owner-occupied means the business that owns (or is purchasing) the property also operates from that property. For SBA loans, the borrower must occupy at least 51% of the usable space in an existing building, or 60% in new construction. This distinguishes owner-occupied financing from investment property lending, which has different requirements and higher down payments.

Question 2

What types of loans are available for buying a commercial building for my business?

Accepted Answer

The main options are SBA 7(a) loans (up to $5 million, flexible use of proceeds, government-guaranteed), SBA 504 loans (for larger projects, fixed-rate second mortgage through a CDC), conventional/portfolio loans (faster closing, fewer restrictions, but higher down payments), and USDA Business & Industry loans (for rural locations). The best option depends on your down payment, location, loan size, and whether you need flexibility or the lowest fixed rate.

Question 3

How is commercial real estate lending different from residential mortgages?

Accepted Answer

Commercial loans are underwritten based on the business's ability to repay (cash flow analysis, DSCR) rather than just personal income. Terms are shorter (typically 10-25 years), interest rates are higher, and the process involves more documentation including business financial statements, tax returns, and a commercial appraisal. Down payment requirements are also generally higher (10-25% vs. 3-20% for residential).

Question 4

What is the maximum loan amount for an SBA 7(a) loan?

Accepted Answer

The maximum SBA 7(a) loan amount is $5 million. The SBA guarantees up to 85% of loans of $150,000 or less, and 75% of loans over $150,000, with a maximum guarantee amount of $3.75 million.

Question 5

What can SBA 7(a) loan proceeds be used for?

Accepted Answer

SBA 7(a) loans are among the most versatile lending products available. Eligible uses include purchasing commercial real estate, constructing or renovating a building, buying an existing business, purchasing equipment or inventory, refinancing existing debt, financing partner buyouts, and permanent working capital.

Question 6

Are SBA 7(a) loans fixed or variable rate?

Accepted Answer

Most SBA 7(a) loans carry variable interest rates tied to the Prime Rate. However, some lenders offer fixed-rate options on a case-by-case basis. The SBA sets maximum allowable spreads above Prime based on loan amount: Prime + 3.0% for loans over $350,000, Prime + 4.5% for $250,001 to $350,000, Prime + 6.0% for $50,001 to $250,000, and Prime + 6.5% for loans of $50,000 or less. Rates adjust as Prime moves.

Question 7

How long does it take to close an SBA 7(a) loan?

Accepted Answer

A typical SBA 7(a) real estate loan takes 60 to 90 days from complete application to closing, though timelines vary. The process includes credit analysis (1-2 weeks), SBA authorization (1-3 weeks), third-party reports like appraisals and environmental assessments (3-5 weeks), and legal/closing preparation (2-3 weeks). Delays usually come from missing documentation or complex deal structures.

Question 8

Is there a prepayment penalty on SBA 7(a) loans?

Accepted Answer

For SBA 7(a) loans with maturities of 15 years or more, there is a subsidy recoupment fee if the borrower voluntarily prepays more than 25% of the loan in any one year during the first three years: 5% of the prepayment amount in year one, 3% in year two, and 1% in year three. After year three, there is no fee. Loans with maturities under 15 years have no prepayment penalty. The fee is calculated on the prepayment amount, not the total outstanding balance.

Question 9

How is an SBA 504 loan structured?

Accepted Answer

The 504 loan has a unique three-party structure. A conventional lender provides approximately 50% of the project cost as a first mortgage. A Certified Development Company (CDC) provides up to 40% as a second mortgage, backed by an SBA-guaranteed debenture. The borrower contributes at least 10% as equity injection. This structure allows borrowers to get up to 90% financing with a long-term fixed rate on the CDC portion.

Question 10

What is the interest rate on an SBA 504 loan?

Accepted Answer

The CDC/SBA portion (40% of the project) carries a fixed rate tied to the current market rate on 5-year and 10-year U.S. Treasury issues, plus a spread. This rate is locked in when the debenture is sold (monthly pools). The bank's first mortgage portion (50%) can be fixed or variable at the bank's discretion. The blended rate across both components is often very competitive.

Question 11

Can an SBA 504 loan be used to buy an existing business?

Accepted Answer

No. SBA 504 loans are specifically for fixed-asset projects: purchasing land and buildings, constructing new facilities, renovating existing buildings, and purchasing long-lived equipment. They cannot be used for business acquisitions, working capital, or inventory. If you need to buy a business along with its real estate, the SBA 7(a) program is the appropriate option.

Question 12

Are there job creation requirements for SBA 504 loans?

Accepted Answer

Yes. The 504 program requires that the project create or retain one job for every $95,000 of CDC debenture proceeds ($150,000 for small manufacturers and energy-related projects), or meet one of several community development or public policy goals. These goals include improving the local economy, expanding exports, supporting minority-owned businesses, or locating in a rural area or enterprise zone.

Question 13

Does my business qualify for an SBA loan?

Accepted Answer

To qualify, your business must be a for-profit entity operating in the United States, meet the SBA's size standards for your industry (based on NAICS code), not be engaged in certain restricted industries (lending, real estate investment, speculation, gambling), and have owners with reasonable personal credit. The business should also demonstrate ability to repay the loan from operating cash flow.

Question 14

Can I get an SBA loan with bad credit?

Accepted Answer

There is no official minimum credit score set by the SBA, but most SBA Preferred Lenders require a minimum FICO score of 650-680 for all guarantors. Scores below 650 make approval significantly more difficult. Beyond the score, lenders review the full credit profile, including payment history, outstanding obligations, bankruptcies, and derogatory items.

Question 15

Can a startup get an SBA loan to buy commercial real estate?

Accepted Answer

Yes, but it is more challenging. The SBA requires a minimum 10% equity injection for startups (businesses in operation 1 year or less). Beyond that, startups typically need strong personal credit, relevant industry experience, and a detailed business plan with realistic projections. Some lenders may require more than 10% at their discretion. Franchises with proven business models often receive favorable consideration.

Question 16

Can non-U.S. citizens get SBA loans?

Accepted Answer

Effective March 1, 2026 (SBA Procedural Notice 5000-876626), SBA financing is limited to businesses where 100% of all direct and indirect owners and SBA-required guarantors are U.S. citizens or U.S. nationals whose principal residence is in the United States. Lawful permanent residents (green card holders), including both conditional and unconditional status, are now classified as ineligible persons, along with visa holders, refugees, asylum recipients, and DACA recipients. There is also a six-month lookback: if an ineligible person was an owner or key employee in the six months before the application, the business is ineligible unless that person has permanently severed ties. These rules have changed repeatedly, so confirm current eligibility with your lender.

Question 17

How much down payment do I need for a commercial building?

Accepted Answer

It depends on the loan program and your situation. For SBA 7(a) loans, there is no SBA-mandated equity injection for existing businesses, the lender evaluates whether the equity position is adequate. However, startups (1 year or less in operation) require 10%, and complete changes of ownership also require 10%. SBA 504 loans require 10% standard, 15% for new businesses or special-purpose properties, and 20% when both conditions apply. Conventional loans generally require 20-25% down.

Question 18

What counts as an equity injection?

Accepted Answer

Acceptable sources include cash savings, cash gifts (with a gift letter), equity in existing real estate being pledged, business retained earnings, certain retirement account rollovers, and seller debt on full standby (up to half of the required injection). Sources that do NOT count include borrowed funds (unless on full standby for the life of the SBA loan), sweat equity, unsecured personal loans repaid from business cash flow, or funds from an interested third party.

Question 19

Can the seller carry a note to reduce my down payment?

Accepted Answer

A seller can carry a note, but it does not reduce the borrower's minimum equity injection requirement. The seller note must be on "full standby" (no payments of principal or interest for the full term of the SBA loan). Standby seller debt may count toward equity, but only up to half of the SBA-required equity injection. For example, if $100,000 in equity is required, a maximum of $50,000 can come from a standby seller note.

Question 20

What interest rates can I expect on a commercial real estate loan?

Accepted Answer

SBA 7(a) variable rates are capped at Prime plus a spread that depends on loan amount (Prime + 3.0% for loans over $350,000 is the most common cap). SBA 504 CDC rates vary by debenture pool but are fixed for the life of the loan on the second mortgage, with the bank's first mortgage at its own rate. Conventional loans vary widely based on the lender, borrower strength, and market conditions. Rates are always subject to change.

Question 21

What is the typical term for a commercial real estate loan?

Accepted Answer

SBA 7(a) real estate loans have a maximum term of 25 years, fully amortizing. SBA 504 debentures are available in 20-year and 25-year terms, also fully amortizing. Conventional commercial loans typically have 5-10 year terms with 20-25 year amortization, meaning there is a balloon payment at maturity.

Question 22

What fees are involved in an SBA loan?

Accepted Answer

SBA loans involve the SBA guarantee fee (2% for loans up to $150,000; 3% for $150,001-$700,000; 3.5% on the first $1 million of guaranteed portion plus 3.75% above $1 million for loans over $700,000), lender origination/packaging fees, third-party costs (appraisal, environmental, title, survey, legal), and for 504 loans, CDC processing fees. Many of these fees can be financed into the loan amount.

Question 23

What documents do I need to apply for an SBA loan?

Accepted Answer

Typical documentation includes 3 years of business and personal tax returns, year-to-date financial statements, personal financial statement (SBA Form 413), business plan or narrative, purchase agreement or lease, business licenses and formation documents, schedule of existing debts, and SBA-specific forms (Form 1919, Form 1920, etc.).

Question 24

What is the SBA authorization letter?

Accepted Answer

The SBA authorization is the formal approval document issued after the SBA approves your loan. It outlines every term, condition, and requirement that must be satisfied before the loan can close. It covers loan amount, rate, term, collateral, insurance requirements, equity injection verification, and any special conditions.

Question 25

Can I close on an SBA loan before the SBA authorization is issued?

Accepted Answer

No. The SBA authorization must be issued before any loan documents can be prepared and before closing can occur. Lenders submit the loan package to the SBA (or, for Preferred Lenders, make the credit decision under delegated authority), and the authorization is generated upon approval.

Question 26

Does the SBA require collateral for all loans?

Accepted Answer

The SBA does not decline a loan solely for lack of collateral, but lenders are required to take available collateral as security. For real estate loans, the property being financed is always the primary collateral. If the property value does not fully secure the loan, the lender may take liens on additional business or personal assets.

Question 27

When is a full commercial appraisal required?

Accepted Answer

Under SOP 50 10 8, the commercial real estate appraisal threshold is $500,000. When the SBA-financed real estate is $500,000 or less, the lender may rely on an evaluation instead of a full appraisal. When it is more than $500,000, a complete appraisal report from a state-licensed or certified appraiser, compliant with the Uniform Standards of Professional Appraisal Practice (USPAP), is required. A second appraisal is only needed in limited cases, such as when the lender has a reasonable basis to question the first.

Question 28

What happens if the appraisal comes in low?

Accepted Answer

If the appraised value is lower than the purchase price, the borrower typically has several options: renegotiate the purchase price down to appraised value, increase the equity injection to cover the gap, provide additional collateral, or walk away from the deal (if contingencies allow). The SBA loan amount is based on the lesser of the purchase price or appraised value.

Question 29

Can I refinance my existing commercial mortgage with an SBA loan?

Accepted Answer

Yes, but SBA refinancing has specific requirements. The existing loan must be on satisfactory terms (current on payments), and the new installment payment must be at least 10% less than the existing payment. Exceptions to this test include balloon or demand notes, credit card debt, HELOCs, and lines of credit where the lender will not renew, these qualify automatically. Cash-out refinancing is limited under SBA rules.

Question 30

What is the "substantial benefit" test for SBA refinancing?

Accepted Answer

For 7(a) refinancing, the SOP requires that the new installment payment amount must be at least 10% less than the existing installment amount(s). Exceptions to this test include debt structured with a balloon or demand note, credit card obligations, HELOCs used for business purposes, and revolving lines of credit where the original lender is unable or unwilling to renew, these meet the substantial benefit test automatically.

Question 31

Can I use an SBA loan to buy out my business partner?

Accepted Answer

Yes. SBA 7(a) loans can finance partner buyouts (change of ownership transactions). There is no minimum ownership percentage threshold, even a partial change of ownership can be financed. The business must be valued by a third-party appraiser, and any person gaining ownership must be a co-borrower. The purchasing partner must meet all SBA eligibility requirements and contribute the required equity injection.

Question 32

Can I finance a franchise purchase with an SBA loan?

Accepted Answer

Yes. SBA loans are one of the most popular financing vehicles for franchises. The franchise must be listed on the SBA Franchise Directory. Franchise fees, real estate, equipment, build-out costs, and working capital can all be included in the SBA loan. Franchises with proven models may receive favorable underwriting consideration.

Question 33

Can I include construction or renovation costs in my SBA loan?

Accepted Answer

Yes. SBA 7(a) and 504 loans can both finance construction and renovation. The loan can cover land acquisition, hard construction costs, soft costs (architecture, engineering, permits), and a contingency reserve. For ground-up construction, interim financing may be required with the SBA loan providing the permanent takeout.

Question 34

What is the difference between a term loan and a line of credit?

Accepted Answer

A term loan provides a lump sum that is repaid over a fixed schedule with set monthly payments. A line of credit provides a revolving credit facility that the borrower can draw from and repay as needed. SBA real estate loans are always term loans. Working capital can be included as permanent working capital within the term loan.

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