Advantages of SBA Lending When Buying Commercial Real Estate

A key benefit of the SBA lending program is that it allows a much lower down payment for business owners when purchasing real estate. Under the SBA 7a program, a borrower can put as little as 0% down on a CRE purchase or construction project. Obviously, this would have to be a strong borrower and subject to your institution’s Credit Department.

It is very common to see banks offering 90% SBA financing - since their risk is reduced with the 75% SBA guaranty. If a borrower can put 15% down the SBA considers the loan fully secured and will not require any additional collateral. In this scenario, the benefit to the borrower is clear when compared to a conventional loan’s 25% to 30% down payment requirements. On a $3,000,000 CRE purchase, the borrower might put 10% or $300,000 down, compared to $900,000. Not only does this make the CRE purchase a more viable opportunity for your client, but also leaves them with working capital to continue growing their business. Let’s look at this from a financial institution’s risk perspective.

Let’s say the borrower ultimately defaults and the institution has to foreclose and resell the property with a 50% recovery or $1,500,000. If it is a conventional loan with $900,000 down and a $2,100,000 loan balance, the loss is $600,000. But if the borrower puts down 10% or $300,000, then the balance is $2,700,000. Again, the recovery is $1,500,000, so the loss is $1,200,000. However, because the SBA guarantees 75% of the loan, the loss is 25% or the same $300,000.

The calculation varies with the recovery on the property, but the higher rate and gain on the sale of the SBA guaranty make the return significantly higher than conventional loan yields. This is an example of how the SBA guarantee can enhance institutions yields, without taking on more risk.

If you’d like to learn more about lowering risk and increasing profitability with SBA loans, find more articles on our dedicated SBA Resources Page.