Heading into 2020, many real estate experts predicted that the industry would soon reach market equilibrium for the first time since the Great Recession. In fact, between August 2010 and August 2020, the number of U.S. housing starts more than doubled, growing from approximately 500,000 to more than 1.25 million.
This decade-long trend, coupled with experts’ 2020 predictions, contributed to a confident real estate industry. However, real estate experts could not have predicted the COVID-19 pandemic and its impact on real estate. The pandemic spurred a massive drop in housing starts down to 934,000, a low not seen since 2013.
Presumably, this drop stems from the loss in income that tenants and homeowners face as the pandemic continues to push the economy ever closer to a depression. As such, real estate companies may need low-cost funding to make it through these choppy waters.
If you own an established real estate company and want to stabilize or grow your business through service expansions, marketing campaigns, or new hires, low-cost small business funding can help. Here are some ways to get it.
The challenges of obtaining real estate financing
Obtaining real estate company funding right now may be especially difficult since the COVID-19 pandemic has rattled the industry. However, even before the COVID-19 pandemic, real estate agents and companies faced challenges funding their businesses.
For starters, many real estate agents work on a commission basis, meaning that without successful transactions, many have taken a significant hit to their income. Additionally, many real estate agents and companies go through years of struggling before breaking even.
During this starting period, accessing funding can be especially challenging. Although real estate is a relatively easy market to enter, lenders often hesitate to fund companies helmed by people without relevant experience. And since stability in the real estate industry can take years to achieve, real estate companies may struggle to show lenders that they have the capacity to repay loans.
Of course, the COVID-19 pandemic has also impacted real estate companies’ funding prospects. Interest in home purchases has declined in urban areas while increasing in less crowded suburban areas. Mortgage rates are at historic lows, and moving during the pandemic may raise safety concerns. However, even with these challenges, funding options remain available for real estate companies.
Funding options for real estate companies
Finding loans with reasonable rates for your real estate company isn’t always easy. That said, with SBA loans, bank term loans, and more, you have options. Below, learn about all your funding routes so you can make an educated decision about obtaining small business loans for real estate. Keep in mind that some loans will take longer to approve and be more affordable than others.
The SBA 7(a) loan program
If your real estate company qualifies for a low-cost SBA 7(a) loan, this option may be your best bet. SBA 7(a) loans are known for low rates, long payment terms, and low monthly payments. This structure makes them great choices for stabilizing your company, saving money, and growing your business.
You can use your SBA 7(a) loan toward:
- Working Capital – Working capital, which is the amount of cash your real estate company keeps on hand for day-to-day operations, often correlates directly with a company’s health. This amount is the difference between your current liabilities and your current assets. A negative difference indicates that you need additional working capital to stabilize your real estate company.
As a real estate company owner, it’s best practice to have enough working capital for all your day-to-day expenses and financial obligations. The money you obtain from an SBA 7(a) working capital loan can go toward purchasing better equipment, hiring employees, and spending on marketing, advertising, and other services that facilitate your main business. - Debt Consolidation Loans – SBA debt consolidation loans allow you to refinance your real estate company’s previous daily or weekly payment loans, merchant cash advances, short-term business loans, or high-interest business loans.
- Commercial Real Estate – Your SBA 7(a) loan can go toward buying owner-occupied commercial spaces for your real estate company. You can also use it to refinance your current commercial real estate mortgages.
Advantages of SBA 7(a) loans for a real estate company
Many small business lending experts view SBA 7(a) loans as the “gold standard.” Their unparalleled reputation stems from their low rates and 10-year terms (except commercial real estate loans, which have 25-year terms).
Additional advantages to choosing an SBA 7(a) loan for your real estate company include:
- Affordable monthly payments
- Wide use of funds
- No prepayment penalties
- Available in all 50 states
Requirements to apply for an SBA 7(a) loan for a real estate company
Requirements for approving an SBA loan will differ somewhat by the lender. For example, many lenders demand a business plan from applying companies, but others (including SmartBiz Loans) don’t require them. When you apply for an SBA 7(a) loan for your real estate company, you can expect to encounter the following criteria.
- No bankruptcies or foreclosures during the past three years
- Personal credit score above 650
- Company located in the U.S.
- No outstanding company tax liens
- Company at least two years old
- No recent charge-offs or settlements
- On-schedule with all personal and business government-related loan repayments
- U.S. citizen or lawful permanent resident at least 21 years old
How to apply for an SBA 7(a) loan for your real estate company
Step 1: Confirm that you qualify for an SBA loan based on the above requirements. Learn more about your requirements via the SmartBiz Loans page about SBA Loan Requirements for Existing Business to learn more.
Step 2: Gather your paperwork. When applying for small business loans for a real estate company, you’ll likely need to file dozens of lengthy documents, so now is the time to begin gathering them. You may also want assistance from your bookkeeper, accountant, or other financial professionals as you compile your paperwork.
Step 3: Decide which loan provider you’ll go with based on their:
Availability
Find out whether you can contact your lender whenever the need arises, whether by phone, email, or other communication routes. Make sure your lender assigns you a representative familiar with your industry, company, and application. A lender that doesn’t take these steps might not be trustworthy.
Transparency
Transparency goes hand in hand with availability. If you notice that your lender flinches when you ask about your loan’s APR or annual interest rate, you may want to pursue other options.
Loan terms
Fine print shouldn’t be complex. After all, that’s where you’ll find your payment schedule and loan costs. Be certain that your total loan amount is clearly displayed, as are your required payment amounts and frequency, your collateral requirements, and (if applicable) your prepayment penalties.
Fees
Hidden fees are a no-go. Make sure your lender charges interest, repayment, and virtually no other kinds of fees. Be certain that your fees are due during your loan’s lifetime before your loan is funded.
Excellent reputation
Before moving forward, read your lender’s reviews (and double-check that actual people wrote their reviews). Look at Consumer Affairs, Google, or TrustPilot reviews to learn about other borrowers’ experiences and compare them to yours.
The SBA 504 loan program
The SBA’s 504 loan program introduces low-cost expansion and modernization funding to small businesses. SBA 504 loans may fit your real estate company if you plan to purchase commercial real estate. Additionally, if your real estate company fits the public policy goals set by your local community development corporation (CDC), then you may also fare well with SBA 504 loans.
If your company does line up with your CDC’s goals, then your CDC may cover as much as 40% of your project cost. Your SBA 504 loan can cover up to half this cost, and your cash down payment will cover the remaining 10%.
The SBA microloan program
Through the SBA Microloan Program, very small businesses (also known as microbusinesses) can access loans of up to $50,000. Although loan requirements will differ by lender, one thing is constant: If your real estate company takes out SBA microloans, you can’t use them toward real estate purchases or debt payments. These are your only two restrictions – otherwise, use your microloans as needed.
Non-SBA loans and other funding options
SBA loans aren’t your only option for real estate company funding. However, your other options may have higher rates, shorter terms, and larger payments. Among these options are:
Bank term loans
When you need money rapidly, but your finances don’t quite hit the mark for SBA loans, bank term loans may help. Usually, your bank term loan can go toward debt refinancing, equipment purchases, and working capital costs. Discuss repayment terms, possible loan amounts, rates, and prepayment penalties with your lender.
Business lines of credit
Business lines of credit give your real estate company access to funds of a certain maximum that varies with your credit. Usually, this means business lines of credit offer you less funding than does a term loan.
If you obtain funding through a business line of credit, you’ll only pay interest on funds you actually borrow. Additionally, you can borrow money as frequently (or infrequently) as needed until you hit your maximum, and typically, you don’t have to put up collateral to secure business lines of credit. To learn more, read the SmartBiz Loans blog Small Business Lines of Credit Pros and Cons.
Like business lines of credit, business credit cards allow funding access as often as you need. However, they still function once you hit their credit limit, whereas business lines of credit immediately expire when you reach their maximum. Additionally, some credit cards come with spending rewards.
Merchant cash advances
If your real estate company takes credit and debit card payments, you might also have merchant cash advances (MCAs) among your funding options. Through MCAs, you can obtain a preset amount of advance funding, which you’ll repay in small amounts each time your company makes a transaction. Alternatively, you can simply repay your loan in regular installments.
While repaying MCA loans is convenient, you may find that affording repayment isn’t as easy. That’s because MCAs often have extremely high APRs. Read more via the SmartBiz Loans blog What You Need to Know About an MCA.
Real Estate Funding Success Story
Steve Brown is the owner of the Atlanta-area family entertainment center Fun Bowl. Brown came to SmartBiz Loans to obtain a 25-year, five-year fixed-rate commercial real estate refinancing loan. “We’re taking care of everything within our walls from flooring to carpeting to glass walls,” Brown says.
Brown also used the proceeds from his SBA 7(a) loan to buy new furniture, add automatic bowling scoring technology, and purchase 70 amusements projected to increase Fun Bowl’s cash flow by 25%. Brown says that his SBA 7(a) real estate refinance will add another 30 to 35% to Fun Bowl’s monthly cash flow. “I’m so appreciative,” he says of working with SmartBiz Loans on his refinancing. “The best 1% I’ve ever spent in my life was with SmartBiz.”
Why choose SmartBiz Loans?
Need funding to rebuild your business? Don’t waste time going from bank-to-bank filling out multiple applications. SmartBiz helps you find the best financing for your unique needs whether that’s an SBA loan, Bank Term loan, or other financing. About 90% of qualified applications we refer to banks are funded and our financial professionals are on hand to answer your questions. Discover if you’re pre-qualified here without impacting your credit scores** and read the SmartBiz 5-star customer service reviews on TrustPilot.
