How SBA Loans Work for Industrial Properties
If your small business occupies industrial space, an SBA loan may be a great fit for your long-term success.
While there are many financing avenues open to industrial assets — particularly those massive, modern, cross-dock distributions centers with 40-foot clear heights and truck courts as far as the eye can see — not every option is available, or even attractive, for those who occupy their own industrial properties. If you run a small business that utilizes industrial space, loans backed by the Small Business Administration may be the right choice for you.
If you’re not familiar with these financing options, note that the Small Business Administration doesn’t actually provide loans through its main programs. Instead financing comes from lenders, with the SBA guaranteeing a percentage of the loan. This makes loans through this program far less risky for lenders to originate, passing on advantageous loan terms to borrowers.
If you’re looking to use an SBA loan for real estate, one important point: They can only be used for commercial real estate that the owner will occupy. That means if you are looking to invest in, say, the multifamily sector, these aren’t the loans for you.
One great thing about SBA loans is that whichever of the two main vehicles you use — whether an SBA 7(a) or an SBA 504 loan — you can take advantage of fixed interest rates. Sure, rates are quite a bit higher now than they were at the start of the year, but they’re very, very likely to go even higher, given the Fed’s activity to combat inflation.
A couple things to keep in mind, though. Both loans have maximum loan amounts of $5 million — though 504 loans can go up to $5.5 million for certain energy efficiency projects or manufacturing operations. They aren’t specifically for real estate, either. Small businesses can also utilize SBA loans — depending on the loan type — to fund working capital, refinance existing debt, and even acquire other businesses, along with several other potential uses.
If an SBA loan sounds like it might be right for you, it’s important to understand the differences between the most common financing vehicles: SBA 7(a) and 504 loans.
Comparing SBA Loans
SBA 7(a) Loans for Industrial Properties
The 7(a) loans are the most versatile the SBA offers. Uses can range from financing repairs to buying real estate your business will occupy. Most lenders require 10% down payments, though this percentage can climb higher for certain types of businesses. Loan terms involving real estate are typically 25 years, and the interest rate is fixed to the Wall Street Journal Prime rate, with spreads of anywhere from 1.75% to 2.75% depending on the type of real estate asset involved. Non-real estate loans usually cap at 10 years with a rate fixed at the WSJ Prime plus 2.75%, with slightly higher rates for loans under $350,000.
SBA 504 Loans for Industrial Properties
504 loans can appear a little more complicated than a 7(a). There are more restrictions in place for 504 loans, for one. These financing products can typically only be used for what are known as “fixed assets and certain soft costs,” essentially translating to buying land or real estate, property renovations, constructing a building, or buying machinery — so long as it’s tied to your business activity. They can also be used to refinance debt connected to any of the above.
Loans under the 504 program are also structured very differently. A Certified Development Company, or CDC, will coordinate financing but will contribute no more than 40% of project costs. A bank or credit union will hold a conventional first mortgage of up to 50% of the costs. The remaining 10% is borne by the owner of the small business. Because there are two different layers to the financing stack, they can each bear different interest rates. The funding from the CDC is tied to length of the loan — 10, 20, or 25 years — and its corresponding Treasury bond rate.
Other Key Considerations
Even if one financing option appears more attractive than the other for your industrial real estate property, there are a number of factors to take into consideration.
For one, is your business even eligible for the financing? SBA-backed loans are available for myriad companies, but they do have some pretty clear-cut exclusions, including real estate investment companies, casinos, and lobbying firms. You’ll also need to provide a clear and feasible business plan. Further, you will be required to provide in-depth detail for every principal in the company, and lenders will examine your creditworthiness as part of the lending process.
It may sound like a lot — and in many ways it is — but it doesn’t have to be a lengthy, complicated process. SBA 7(a) loans, for example, can close in a matter of a couple business days. Not sure if you’re eligible, or if this type of financing is right for you? Head over to our lending platform, and we’ll be happy to walk you through the whole process.
Related Questions
What are the eligibility requirements for an SBA loan for an industrial property?
The SBA has two main standards for business size — fewer than 500 employees for manufacturing and mining industries, and under $7.5 million in average annual receipts for non-manufacturing industries. You can check the SBA's size requirements for your specific industry. Additionally, you can learn more about eligible and ineligible industries for SBA 7(a) loans.
What types of industrial properties are eligible for an SBA loan?
Industrial properties such as warehouses, distribution centers, refrigeration and cold storage facilities, and large-scale manufacturing plants are eligible for an SBA 7(a) loan. According to SBA 7(a) Loans Small Business Blog, other eligible building types for 100% SBA 7(a) financing include medical and dental offices, office condos, professional office buildings, pharmacies, auto-repair businesses, pre-schools, and certain fast-food/quick service restaurant buildings.
According to Commercial Real Estate Loans, industrial properties are broadly eligible for CMBS financing. One of the most beneficial perks to utilizing CMBS loans for industrial assets is the assumability.
What are the advantages of an SBA loan for an industrial property?
The SBA 7(a) loan is a versatile loan, and can be used for a variety of purposes, including the purchase of commercial real estate. Advantages of an SBA 7(a) loan for an industrial property include:
- SBA 7(a) loans are typically easier to qualify for than other types of loans.
- They can be used for a variety of purposes, including the purchase of commercial real estate.
- They have terms of up to 25 years for real estate, which can make them easier to repay.
For more information, please see 3 Ways the SBA 7(a) Loan Can Help Entrepreneurs with Owner-Occupied Commercial Real Estate and What's the Difference? SBA 7(a) and 504 Loans in Commercial Real Estate.
What are the disadvantages of an SBA loan for an industrial property?
The disadvantages of an SBA loan for an industrial property include:
- Lengthy approval times (for standard SBA 7(a) loans)
- Lots of documentation
- Collateral is often required
- Certain businesses, including real estate investing, lending, gambling, and speculation are prohibited
- High credit scores are typically required (typically 680+)
- May be restrictions on supplemental/additional financing
What documents are required to apply for an SBA loan for an industrial property?
To apply for an SBA loan for an industrial property, you will need to provide the following documents:
- SBA Form 1919 (borrower information form)
- SBA Form 912 (statement of personal history)
- SBA Form 413 (personal financial statement)
- Business and affiliate financial statements, including a balance sheet, profit and loss, and income projection
The SBA allows applicants to get help (for example, from a lawyer or a translator) filling out the application paperwork, but your lender will be required to submit information about who gave you help to the SBA, so you’ll need to document who this person is as well.
How long does it take to get approved for an SBA loan for an industrial property?
The length of time required for an SBA 504 loan to be approved can vary drastically, but averages between 60 and 90 days. With that being said, it may take up to six months in some situations. There is no hard and fast rule here, and each situation will be unique. Factors that go into determining the length of time to loan approval include:
- Your ability to gather all required information
- Your ability to satisfy all lender requirements for information and proof of income
- SBA approval (up to 7 days)
- Due diligence (2 to 3 weeks)
- Closing (up to 14 days)
For borrowers dealing with Certified Lenders, the SBA is able to expedite application approvals. The process is much shorter than the standard 7(a) loan approval processing -- it only takes three business days.
We’re here to help you get the commercial financing you need. Simply fill out the form below for a risk-free consultation and a free SBA loan quote!