How Does an SBA Commercial Construction Loan Work?

August 15, 2022

The U.S. Small Business Administration (SBA) supports small business growth through various taxpayer-funded programs. One of the most valuable tools for small businesses that want to expand their business is applying for an SBA commercial construction loan.

An SBA loan can help you finance a building purchase or support other commercial construction-related activities designed to help you continue growing.

There are two different types of SBA commercial construction loans, which we will unpack so that you are aware of your options and understand how these loans work. First, the key is ensuring that your business is in the right position to pursue an SBA commercial construction loan.

Who is the Ideal Candidate for an SBA Commercial Construction Loan?

The ideal applicant for an SBA commercial construction loan has rented their physical business space for a certain period of time and now they want to take the next step in their business life cycle to own a building built to meet their needs. For example, you may want to perform one of these actions:

• Purchase the building that you are currently renting and update it for your business.
• Buy a different building and perform renovations.
• Complete a ground-up construction project on new land.
• Expand existing facilities on property you already own.

We often work with businesses that have outgrown their current space and want to expand on their existing property or find another more suitable property for a new building. However, companies in this position are often not yet at the point where they can afford large payments as part of a standard construction loan. The long repayment terms available through an SBA loan can help make it more affordable.

At this stage of growth, companies can borrow money through an SBA loan for the designated construction purpose (e.g. renovation, expansion, or new building). Then, by having access to a larger building, they can expand capacity and operate more efficiently to increase cash flow and grow the business.

For renters, the idea is that instead of continuing to pay rent for an existing building, your company could use that money to own your own building. And, to help borrowers transition from a leased facility to their own building, SBA loans may provide for favorable loan payments during the construction of the building. The loan will then convert to standard loan terms once your business occupies the space.

When we work with companies that are interested in applying for an SBA loan, we look at your current financial position and future cash flow projections if you were to occupy a new space. These future projections will help you out, as our credit decision is not solely based on the historical performance of your business. This is one reason why many small businesses prefer an SBA construction loan over a standard construction loan.

However, it’s worth noting that there is a very important requirement to qualify for this type of loan. Your company must occupy the majority of the facilities that you intend to build (see below).

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An Important Note About Owner Occupied Property

SBA commercial construction loans must meet the definition of being an owner-occupied property. In other words, you cannot use an SBA loan to build on the property, then rent all or the majority of the space to third-party tenants. The SBA loan program is intended to benefit small businesses, not real estate investors who might look to take advantage of the favorable SBA loan terms.

In the beginning, you must occupy at least 51% of the property. (In some cases, the minimum requirement is 60% owner occupied.) Then, over time, you will be required to meet an even higher threshold for occupying the property.

For example, if you use SBA loan funds to construct a new building on a piece of property, your business must occupy at least 60% of the rentable square footage. Then, you must occupy 20% more of the property over the next two years. You can permanently lease out a portion of the space to third-party tenants, but you must occupy at least 80% for the remaining loan term.

To ensure eligibility for this type of SBA loan, you must provide proof that your company will occupy the majority of the property in the beginning, then be prepared to occupy at least 80% of the property over a given period of time.

If you can satisfy the owner-occupied requirements, then you are in good shape to be considered for an SBA construction loan. Now, let’s review the two different SBA loan options that are available to support your construction plans.

Which SBA Lending Option is the Right Fit?

The SBA offers two primary loan programs: SBA 7(a) and SBA 504. Due to certain differing conditions in the two programs, we have found that the SBA 7(a) program is generally preferred for construction loan products. However, the 504 loan program can be an excellent option for certain projects and borrowers.

In an SBA 7(a) loan, we typically structure the deal where the borrower only pays interest during construction. Then, the loan converts to a fully amortizing loan that is usually 25 years in length.

Also, potential business borrowers are only responsible for as little as 10% of equity upfront. (Some loans vary based on your financial position.) In a non-SBA commercial loan, we typically require 20-25% equity. However, the SBA program allows us to request less from the borrower. This way, you can conserve cash to support operations and you don’t have to commit as much upfront to the project.

For example, if you are pursuing a $1.0 million commercial construction project, you would make a 10% down payment ($100,000) to satisfy the SBA equity requirement. Comparatively, in a conventional commercial real estate construction loan, you would potentially have to commit $250,000. You can hold onto a large chunk of cash with an SBA loan to support business growth.

Sounds like the right fit for your business? Let’s review the loan application process through Texas Gulf Bank.

How to Apply for an SBA Commercial Construction Loan

We want you to be prepared to apply for an SBA commercial construction loan. There are many moving parts to this type of business loan, which is why we want to share how this process works so that you are ready to satisfy each requirement.

We utilize an SBA Loan Application Checklist during the loan application process. Here are the key items on our checklist to apply for an SBA business loan including but not limited to:

1. A completed business loan application.
2. Business financial exhibits: we will request a detailed business description (or business plan if needed), financial statements, tax returns, interim financial statement, business debt schedule, Accounts Receivable, Accounts Payable, a listing of assets, monthly cash flow projections, and other documents.
3. Personal financial exhibits for each owner with 20% or more ownership and each guarantor. We request personal financial statements, tax returns, resumes and other identifications.
4. Legal Entity Documents for the company, all business obligors, borrowers, and guarantors.
5. Commercial Real Estate documentation: for all real estate transactions, if applicable, we request real estate income and debt schedules, rent rolls, operating statements, leases, surveys, existing appraisals, and environmental reports.
6. Commercial Real Estate construction loans: We will request a copy of the contract/bid for work to be done, construction budget/plans and specifications, quotes for machinery and equipment, builder/general contractor information, a copy of the purchase agreement if you are acquiring real estate, and various other documents that may be needed.

We may request other documents that pertain to your specific situation, such as a copy of the business purchase agreement of any operating business that will be acquired as part of the loan.

How Long Will the Loan Application Process Take?

We want to ensure that you have the appropriate expectations for how long the SBA loan review, approval, and origination/funding process will take. It is reasonable to expect that this process may take 90-120 days from start to finish. We provide a wide range because there are many different factors that impact the timeline.

1. Can you prove that your business will meet the owner-occupied requirements?
2. Did you provide us with a complete and thorough loan application?
3. Do you have all the requested documentation to support your loan application?
4. Do you have construction permits? Or, are you waiting for architectural and engineering drawings to be completed?
5. Has the city where you plan to build approved the building plans?
6. Once we take care of our part, the loan must go through the SBA approval process that is independent of our bank’s approval.

Ultimately, the timeline will be pushed out if any steps in the process take longer than expected. One of the best ways you can help expedite the loan review process is to have completed plans. We understand this is expensive, so you may want to start with a preliminary plan and budget. Then, you can come to our bank with estimates and figures to see if the deal will work for an SBA construction loan.

Our goal is to help uncomplicate a very complex process. This way, we can help you navigate each step along the way on the path to being approved for funding.

Apply Today for an SBA Commercial Construction Loan

If your business meets the qualifications for an SBA business loan, we encourage you to start the application process immediately so that you can shorten the timeline.

Our bank is uniquely qualified to help applicants walk through the SBA business lending requirements. We’ll answer your questions, review your goals for expanding business operations, and help you satisfy the loan application requirements.

For more than 110 years, we have helped businesses along the Southeast Texas Gulf Coast grow their business through our available lending products. We can do the same for you.

Get in touch with us today to see if an SBA construction loan is the right fit for your business. To get started, contact our team today, stop by one of our banking centers to speak with a lender, or call us at 800.467.7216.

All Loans Subject to Credit Approval