23 Jun What Financing is Available to Buy a Business and the Business Real Property?
When you have the opportunity to buy the real property out of which a business operates, most buyers jump at the chance.
And why not? Owning a building gives you control that being a tenant does not. You’re building equity in a tangible asset rather than writing a rent check every month. Ideally, what you pay in mortgage isn’t dramatically more than what you would have paid in rent.
When the purchase includes both a business and its real property, you have two government-backed financing options: the SBA 7(a) loan and the SBA 504 loan. Understanding which one fits your deal before you walk into a lender’s office will save you time and confusion.
Which loan is the right fit for my deal?
The honest answer comes down to one question: what are you primarily buying?
If you are buying an established business – one with cash flow, customers, and goodwill built up over time – and the real estate comes with it, the 7(a) is almost certainly your path. It finances everything in a single loan: goodwill, equipment, real estate, and closing costs. One lender, one closing, one monthly payment.
If you are primarily buying a building and its hard assets, you need to ask whether, as an experienced operator, we’ll you be generating your own revenue rather than relying on the seller’s track record? If the answer to that is yes, the 504 is worth exploring. It is specifically designed for real estate and other qualifying tangible assets. It does not finance goodwill.
How does the SBA 7(a) loan work?
The 7(a) is the SBA’s most widely used program. A single lender makes the loan, and the SBA guarantees a portion of it. That guarantee is what makes lenders willing to finance transactions they’d otherwise pass on.
- Down payment: 15% when real property is involved. Some lenders may quote you 10%. That is an exception for specific business-only acquisitions and should not be assumed
- What it finances: The full package – business goodwill, equipment, real estate, working capital, and closing costs
- SBA guaranty fee: Charged on the guaranteed portion of the loan. On loans over $1 million, the fee is 3.5% on the first $1 million guaranteed and 3.75% on the amount above that. It is typically financed into the loan
- Interest rate: Sometimes fixed, sometimes variable, depending on the lender. Most interest rates are tied to prime with a 1.5%–2.5% spread.
- Term: Up to 25 years when real estate is included
- Best for: Acquisitions where established cash flow and goodwill are a meaningful part of what you’re paying for
How does the SBA 504 loan work?
The 504 is designed for fixed assets; namely, real estate and equipment with a useful life of ten years or more. It does not finance goodwill or working capital. If the business you are buying has meaningful goodwill above its hard asset value, that portion of the purchase price needs to be covered by additional buyer equity or seller financing. That limitation alone rules the 504 out for many business acquisitions.
When the 504 does fit, it uses a split structure: a conventional bank loan and a separate CDC loan, backed by the SBA, running simultaneously. You will have two lenders and two monthly payments.
For a standard commercial property:
- 50% conventional bank loan (first lien)
- 40% CDC/SBA loan (second lien)
- 10% buyer equity
For a special purpose property:
Special purpose properties are buildings designed for a specific use that limits their value to other buyers – an automotive shop, a restaurant with a commercial kitchen, a car wash. These carry more lender risk.
- 50% conventional bank loan
- 35% CDC/SBA loan
- 15% buyer equity
- Startup businesses in a special purpose property may be required to put down 20%
Across both property types:
- Interest rates: Two separate rates. The bank sets its own rate on the first lien, typically variable. The CDC rate is fixed at funding, tied to Treasury rates
- Best for: Experienced operators buying a facility as their primary asset, where the real estate and equipment tell the story – not the seller’s historical cash flow
What’s the practical difference for a buyer?
The 7(a) is more flexible and handles more deal types. The 504 can offer a fixed rate on the real estate portion and, in some cases, a lower equity requirement on a standard commercial property. While that’s the upside, the downside is that it comes with two lenders, two closings, and a hard limit on what it will finance.
Most buyers acquiring an established business with real property will find that the 7(a) handles their deal cleanly. The 504 is a better fit for a narrower set of transactions – those where hard assets dominate and the buyer is bringing their own operational track record to the table.
Either way, different lenders have different program preferences and will make the case for their preferred approach. Knowing the basics before those conversations start puts you in a better position to ask the right questions.
If you are considering buying a business in New Mexico and want to talk through your financing options before you get to a lender, Sam Goldenberg & Associates is happy to help. That’s part of what we do.
