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How to utilize SBA to buy a building for your business – A case study.

SBA loans have been around for many years. Founded in 1953, the Small Business Administration assists small business owners in the start up and growth as well as offering organizational resources. In short, this is how it works: Your bank issues you a loan and the SBA backs the Bank and essentially guarantees the loan. You then continue to pay the bank the monthly payments (in some cases you may have 2 loans – the bank and the SBA, or a division locally of it). The reason banks like this is that their risk is reduced. We won’t go into the different programs available here, but I do want to share a recent scenario of how we have used SBA loans to help clients open a new location for their business.

The Client is a high-end flower shop. Needing more space to grow, assemble and sell their products, a new larger location was necessary. Here is how the process unfolded:

The first step was getting preliminarily qualified for the loan. This didn’t take much more than meeting with an SBA lender and providing the necessary documents for the review process.

Once we knew that the client was initially qualified, we needed a building. In this case, the property that the client ended up choosing was not listed on the market - meaning the seller had not hired a broker or advertised that the property was available for purchase – and the deal was put together by quite literally knocking on the door.

The building was an office warehouse property in an up and coming area of the City. Because the use of the Buyer was more Retail than the existing use, there was substantial improvements needed to utilize the building for its intended use. Because the Buyer was in a growth stage and putting money back into the business, a conventional loan would not have been feasible (most conventional commercial real estate loans require 20-25% down and would not include the construction costs).

To make it easy, let’s say the building was purchased for $750,000. During the due diligence period, we hired an architect to design the space and a General Contractor to bid the work. Again, for this story let’s say that the total construction cost, including architect, engineers and permitting was $250,000. Once the bids were established, the purchase price and the construction costs were sent to the lender and the loan amount the was applied for was the $1,000,000.

Once the total costs are known, the lender orders the appraisal. The property needs to be valued at the purchase price plus the improvements – so, the future completed projects value needed to be $1,000,000. We had no problem achieving that value and were able to move forward.

Upon closing on the purchase, the Buyer put only 10% or $100,000 down, took ownership, used the $250,000 to make the changes to the space and have a loan of $900,000 with a relatively low interest rate. A conventional loan would have required about 20% down on the purchase of the $750,000 and either cash for the construction or finance the construction with another loan (with another down payment, likely higher interest rate and shorter payback period).


SBA Loans aren’t for everyone and do have their negatives, however, for small business owners that want to reserve cash for operations and still need to purchase commercial real estate, it is a great option to consider. In this scenario, I’ve over simplified it. It can be a complicated, lengthy and frustrating process. It is absolutely necessary for a successful transaction to hire a Real Estate Agent that has experience with not only Commercial Real Estate transactions but also knows the SBA process. It is also imperative that the lender you choose specializes in SBA loans. I have seen too many Buyer get 6 weeks into a transaction with an unexperienced lender and by the time I get involved it’s too late and the Buyer ends up losing the deal altogether.


For more information on how you could use SBA, please reach out to me to discuss the process.

Jonah Hornsby