Commercial mortgages are popular because they are relatively simple, the interest costs tend to be low compared to rates for other instruments, and the loan terms allow you to spread the cost of an asset over decades, not just years. At the same time, the stringent requirements most banks place on conventional real estate loans can be prohibitive for new companies. That is where SBA loans come in. Many small businesses that do not qualify for traditional loans still find the SBA’s programs suit them well, due to the differences between the programs. SBA loan packages are designed to provide access to small companies, so all those differences are essential to the experience.

Down Payment Requirements and LTV

The two programs that allow for the purchase of real estate are the 504-loan program and 7a loans. The former is a multi-asset loan designed to allow you to purchase real estate, equipment, and even qualified franchise licenses with a single loan to cover it all. The latter is strictly for property purchases where your business will occupy the majority of the space.

In both cases, a minimum down payment of 20% is required. This is to demonstrate the borrower’s shared risk and to make sure the collateral has some equity to start. Of the remaining 80%, half is guaranteed by the government to lower the risk to the lender. This is what allows businesses that do not meet the requirements for operational history or income to access loans similar to commercial mortgages.

Loan Terms and Prepayment

Commercial mortgages typically allow borrowers to pay early without any penalty, and the loan terms are usually either 10 or 20 years. By contrast, SBA loans for the same purchase could have terms as long as 25 years, but typically will not have terms below 15 years. Depending on the program’s exact requirements, you may also be restricted from early payment for a short period at the beginning of the loan, to encourage reinvestment in the business during its critical early years.

Speed Up Approval Times

The wait times for SBA loan approvals tend to be longer than for conventional loans with similar costs and terms, but there are ways to speed things up. Traditionally, the SBA approves loans separately from the lender and after the lender does, which doubles the time spent in consideration and prevents you from simultaneous applications. Preferred lenders, on the other hand, approve the entire loan themselves, and that speeds things up while allowing you to try more than one lender at a time. If you need to line up a loan quickly, that makes a big difference.