Purchasing a commercial building for your business can be a strategic move for any owner looking to secure a long-term home and build wealth simultaneously. To read more about the pros and cons check out my previous article, Building Ownership: Is it the Secret Sauce for Restaurant Success? One avenue to explore in the pursuit of property ownership is utilizing Small Business Administration (SBA) financing. In this article, we will shed light on what SBA financing is, delve into the advantages and disadvantages of buying a commercial property through SBA financing, and outline general terms for an SBA loan.
Understanding SBA Financing:
The Small Business Administration (SBA) is a government agency that provides support to small businesses, including facilitating financing solutions. SBA financing is a viable option for entrepreneurs looking to purchase commercial real estate for their operations. SBA loans are typically characterized by more favorable terms and lower down payment requirements compared to traditional commercial loans. However, there are also downsides to SBA laons including stricter requirements on the borrowers use and higher fees.
Pros of Using SBA Financing:
Low Down Payment: The down payment requirement for an SBA loan is usually lower than traditional commercial loans. For real estate, the down payment can be as low as 10%, making it an attractive option for businesses with limited upfront capital or those that want to conserve capital for other operational needs.
Favorable Loan Terms: SBA loans often come with longer repayment terms. For real estate, the repayment term can extend up to 25 years, providing businesses with more manageable monthly payments. The extended timeframe can contribute to better cash flow management.
Competitive Interest Rates: The SBA sets maximum interest rates that lenders can charge on SBA loans. Because of this, SBA loans usually offer very competitive interest rates, making it an attractive option for businesses seeking cost-effective financing solutions.
Cons of Using SBA Financing:
Lengthy Approval Process: SBA loans typically have a longer time to close, usually around 60 days or more. The extensive approval process can be a drawback for businesses that require a quicker close to be competitive in purchasing a building compared to other buyers.
Occupancy Requirements: Most SBA loans require the borrower to occupy at least 51% of the property. The requirement is 60% for new construction. If a business fails to meet the occupancy requirement it could lead to default under the terms of the loan. This requirement may limit the buyers ability to lease out the building should things change with their business.
Higher Fees: SBA loans often have higher fees than traditional commercial loans since they are a more complicated loan type. Some examples of these additional fees are guarantee fees, packaging fees, SBA Express Fees and higher closing costs.
Stringent Qualification Criteria: SBA loans often have a more strict eligibility requirement, including a thorough examination of the business's financial health, credit history, and the borrower's ability to repay the loan. Startups might find it more challenging to qualify, but established businesses with a history of financial stability may have an advantage.
Buying a commercial property for your business through SBA financing can be a prudent decision, given the favorable terms and potential for wealth building. However, it's essential to carefully weigh the pros and cons, ensuring that the benefits align with your business's long-term goals. By understanding the intricacies of SBA financing and harnessing the wealth-building potential of real estate ownership, you can make informed decisions that contribute to both your business's success and your personal financial growth.
If you are thinking about purchasing a commercial building in the Denver or Boulder, Colorado area please reach out to me. For over a decade I have been assisting business owners and restaurateurs to make their culinary dreams a reality. I would love to help you as well.