SBA rules · SOP 50 10 8.1
Can an SBA loan be used for construction?
Yes, both SBA 7(a) and 504 loan proceeds may be used for new building construction, conversion, expansion, and renovation, subject to strict occupancy thresholds and construction administration requirements.
Quoted from SBA SOP 50 10 8.1Every quote checked word for word
In detail
- Eligible uses: A borrower may use proceeds from any SBA loan to construct new buildings, complete site improvements, or convert, expand, or renovate existing buildings; however, loan proceeds may never be used to improve or renovate space that will be leased to a third party.
- Occupancy requirements: For new construction, the applicant must occupy at least 60% of the rentable property upon completion (leasing out up to 20% permanently and up to an additional 20% temporarily), whereas for existing building renovations, the applicant must occupy at least 51%.
- 7(a) construction administration: For 7(a) construction projects over $350,000, the lender must obtain plans and specifications, a fixed-price contract, progress inspections, lien waivers, borrower equity injection before disbursement, and 100% performance and payment bonds along with builder's risk insurance, unless bonding is waived through a qualified third-party or internal construction management department.
- 504 construction administration: 504 construction is funded on an interim basis or through a construction escrow account, requiring verified contracts, progress payments, lien waivers, and final completion certifications, with additional inspection and mortgage recording mandates if the CDC provides interim financing.
- Seismic standards and self-construction: All new construction and building additions under 7(a) and 504 must provide evidence of compliance with NEHRP seismic standards, and do-it-yourself construction is permitted only if the borrower is an experienced, licensed contractor performing work at or below market cost with no profit.
The source
What the SOP says
“Convert, expand, or renovate one or more existing buildings;
“Construct one or more new buildings;
“For an existing building, the Applicant must occupy 51% of the Rentable Property and may lease to a third party up to 49%; or
“The Borrower may not use loan proceeds to improve or renovate any of the Rentable Property to be subleased to a third party.
“In the construction of a new building or an addition to an existing building, regardless of whether the project is one that uses an independent licensed contractor or is a “Do-it-yourself” project, Lender must obtain evidence of compliance with the "National Earthquake Hazards Reduction Program Recommended Provisions for the Development of Seismic Regulations for New Buildings" (NEHRP), or a building code that has substantially equivalent provisions.
“If the construction component of the 7(a) loan is $350,000 or less, SBA has granted a blanket waiver on the Lender’s requirement of a performance bond and the labor and materials payment bond and evidence that the contractor carries appropriate Builder's Risk and Worker's Compensation Insurance when the Lender applies the same policies, procedures, and processes for offsetting the risk of construction that it applies to its similarly-sized, non-SBA guaranteed loans for construction.
“The Borrower/contractor will not earn a profit on the construction.
“The SBA Terms and Conditions must address the NEHRP provision when any of the use of proceeds options selected includes construction financing, including leasehold improvements.
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This page quotes the SBA's Standard Operating Procedure 50 10 8.1. Lenders can ask for more than the SBA minimum. It is general information, not a loan approval or legal advice.