How Much Do You Have To Put Down on a Commercial Loan?
Are you buying a property to be occupied by your business? If so, an SBA lender might only require 10% down. Are you buying an investment property, like an apartment building or an office building? Conventional lenders, like banks and credit unions, typically require 25% to 30% down. More below:
Down Payments on SBA Loans
SBA loans are designed to help business owners like you to buy business properties, such as industrial buildings or office buildings, to occupy with your businesses. In general, your business must occupy 51% of the building or reasonably expect to do so in the future. The idea is that, once your business is comfortably relocated to a permanent location, you will increase your production and hire additional workers.
It is possible for the experienced owner of an existing business to buy a business property with as little as 10% down, using an SBA loan. If the business is brand new, however, the SBA will not guaranty the loan with a down payment of less than 30%.
It is important to understand that the Small Business Administration (“SBA”) does NOT make loans. The SBA merely guarantees a portion of your loan. Please remember the word, “portion”. It becomes important in a few moments.
The loan is actually made by a bank or a finance company specializing in SBA (guaranteed) loans. Since the SBA only guarantees a portion of an SBA loan, the SBA lender has considerable loan-loss exposure. It is NOT guaranteed against all loss. For example, suppose an SBA lender makes a $1 million loan, and the SBA guarantees $870,000 of that loan. Boom! The loan goes bad, and the loss is 50% of the amount advanced. Of that $1 million loan, $130,000 is uninsured. In this case, the SBA lender would lose 50% of the uninsured $130,000 portion. Ouch! Making SBA loans is therefore NOT risk-free.
This leads to a super-important point: Every SBA lender underwrites SBA loans differently. You could easily get turned down by 10 SBA lenders, only for the 11th SBA lender to approve your loan application to buy a campground. Why? Perhaps the bank president owns a $250,000 RV and is a huge camping enthusiast.
Now back to the size of your down payment. The absolute minimum down payment to buy a business property using an SBA loan is 10% – but your particular SBA lender might come back and ask for a larger down payment. If this happens, I recommend that you apply to a different SBA lender. You can actually apply to over 75 different SBA lenders using Reliable Funding Group’s affiliate relationships.
Down Payments on Conventional Commercial Loans
A “conventional” commercial real estate loan is one that is not guaranteed by any governmental agency, such as the SBA, the USDA, or Fannie Mae. The overwhelming majority of all conventional commercial loans are made by either banks or credit unions.
If you are buying an office building or apartment building as an investment, perhaps to serve as your retirement income someday, you will need to obtain a conventional commercial loan. Conventional commercial real estate lenders typically require a minimum down payment of 25% to 30% of the purchase price.
Down Payment Strategies
If you have no down payment at all, you are out of luck. If, however, you have a sizeable down payment, but not just the full 25% to 30% of the purchase price to satisfy the bank, you might try:
- Ask the seller to carry back a second mortgage on the real estate you are trying to purchase.
- Ask the borrower to do a cash out refi against other investment properties they own.
