SBA Financing Including Real Estate
May 26, 2023
by a searcher from The University of Michigan - Stephen M. Ross School of Business in Dallas, TX, USA
Question about how SBA loans work when combining real estate with the business.
1) If there is a combined Business + Real Estate opportunity - do lenders a single loan for a longer period###-###-#### years)? Or, are we looking at two separate loans, one for the business with 10 year term and another for the real estate at a longer term?
2) I also heard that if the real estate is worth more than 50% of the total business opportunity, the period becomes 25 years (for a combined business + real estate loan).
Any input here would be much welcome! - Thank you in advance.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
If the use of proceeds is 51% or more for the real estate (not just the business purchase but any working capital you are getting factors into the business purchase side), then you can amortize the entire loan over 25-years. I have not really had an issue getting that done with the majority of the lenders we work with.
If the use of proceeds for the real estate is less than 50%, then you can get a blended amortization. Under a blended amortization the portion of the debt assigned to the real estate is amortized over 25 years, the portion of the business purchase (including any working capital) is amortized out over 10 years, and you get a blended amortization on the entire debt of between 10 and 17.5 years. This will reduce the monthly debt service versus doing two separate loans as you end up extending out the business purchase debt. Depending on how much of the transaction the real estate is, I usually find this method reduces the monthly debt service by between 10% and 20%.
Another option would be to do two separate SBA 7A loans, one for the real estate and one for the business. You might pay slightly work to do it this way as you will have some additional closing costs (not a lot but a few extra dollars), but the advantage to doing it this way is that you amortize the business debt quicker.
Lastly, you could do an SBA 7A loan for the business acquisition and an SBA 504 loan for the property acquisition. The two benefits of doing it this way is that every dollar of an SBA 7A loan counts against your $5 million SBA guarantee limit, but on an SBA 504 loan the SBA 504 only covers 40% of the project cost, so only that 40% counts against your SBA debt limit. If you have an overall transaction size that exceeds the $5 million SBA debt limit and it includes real estate, brining the SBA 504 in might be a way to get it back under that $5 million debt limit. Secondly, SBA 504 loans are typically fixed interest rates versus the variable interest rate on the SBA 7A loan. However, the one challenge that can exist in getting an SBA 504 loan and an SBA 7A loan done is that many lenders want to fund the entire deal and if they are an SBA 7A lender they want both the real estate and business assets funded together. The reason for this is it helps to reduce their risk and loss exposure on the SBA 7A portion of the debt versus doing both separately. So I always warn people if there is a lot of goodwill exposure on their business acquisition with real estate, it might be a challenge to find a lender that will do both the SBA 7A piece and the SBA 504 piece.
Happy to discuss options in more detail at any time. You can reach me here or directly at redacted Good luck.
from Harvard University in Colorado Springs, CO, USA
There are lots of lenders on here, so that’s the best place to start. That being said 2 words of advice. 1. Don’t trust them when they say something is against the rules. Often, individual bankers think that because their bank can’t do something, that it’s against the rules. 2. Rule of thumb is to speak to 10–15 bankers, put in applications with 5-7, get offers from 2-3, close with one. In other words, be persistent and you’ll probably find a bank willing to do the deal. Also, make sure your list of banks has different varieties. 1-5 national lenders, 1-5 regional banks, and 1-5 local banks. You never know which type of bank wants the specific type of business you’ve found. Also, if you can start with your seller’s banker, sometimes they are comfortable with the business already.
best of luck