What Small Business Owners Need To Know About SBA Construction Loans

Do you need help getting your finances in order? Learn tips and ideas for money management and working with a financial advisor.

What Small Business Owners Need To Know About SBA Construction Loans

25 July 2018
 Categories: Finance & Money, Blog


Part of having a business with a physical storefront means accepting the higher rate of wear and tear your building endures. Leasing your space can bring some advantages, as it transfers responsibility for certain structural issues to the landlord, but that can also mean you're at the landlord's mercy when it comes to making necessary repairs.

On the other hand, those who own their business's building (or even sub-lease to other businesses) may find themselves in a seemingly constantly scramble for funds to perform general maintenance, upgrade fixtures, and make other repairs that will keep the building solid and serviceable for the foreseeable future. In many cases, these business owners may benefit from a Small Business Administration (SBA) commercial construction loan. Read on to learn more about these unique construction loans and what you'll need to do to qualify for SBA construction financing.

What is an SBA Construction Loan?

The SBA 504 Commercial Construction Loan program is designed to provide small- and medium-sized business owners with a low-cost way to make needed repairs and improvements to owner-occupied buildings.

There are two main types of loans under this program: 7a loans, which provide 100 percent financing with no down payment, and 504 construction loans, which require a 10 percent down payment. Both loans are guaranteed by the Small Business Administration, which allows lenders to offer more competitive interest rates and terms than might otherwise be available for a relatively low-dollar commercial loan.

How Can You Qualify for One of These Loans?

SBA 7a loans are available to a relatively small subset of business owners: those who own and occupy a general purpose or multi-use building. This category also encompasses doctor's offices, dental and veterinary practices, and other businesses that might not otherwise fit within the program's parameters. It's not available to owners who sublease their entire building and don't occupy any portion of it or to owners who plan to purchase (and renovate) a new building.

On the other hand, 504 loans have broader eligibility criteria, and can be used for both new and existing buildings. Although these loans generally require a 10 percent down payment, the borrower can often use existing assets (including the land on which the building sits) as collateral toward this 10 percent rather than fronting it in cash.

For 504 loans, the lender generally provides 50 percent of the total amount sought, the SBA provides 40 percent, and the borrower makes his or her 10 percent down payment. Depending on the parameters of the specific project, the SBA may require the borrower to increase this down payment to 20 percent, but this is fairly rare.

What Should You Consider Before You Apply?

If you're wondering whether an SBA loan is the best way to raise capital for needed improvements to your commercial building, there are a few factors you'll first want to consider.

The first is the timeline and budget for your project. If improving your building will require your business to temporarily close or relocate, any reduction in cash flow should be planned for, as it may impact your ability to begin repaying your construction loan on time. You may be able to work with your lender to create a repayment schedule that fits with this plan.

You'll also want to evaluate whether your business falls into the eligibility parameters of a 7a loan. If it doesn't, you'll need to identify the funds or collateral you plan to offer as part of the 10 percent required down payment for a 504 loan. In some cases, this down payment can be borrowed; however, lenders will want to ensure that you have enough assets or cash flow to reliably pay both the borrowed down payment and the construction loan itself.