The business location that was perfect for you in the early days may be bursting at the seams as your business has grown. Renovation and expansion loans can help you build out or renovate your business space to accommodate more customers and more orders.
This guide will tell you where you can get a renovation loan, what documents you’ll need to get it, what costs to expect, and how to up your chances of approval. To get this information, I interviewed Chris Hurn, founder and CEO of Fountainhead Commercial Capital, a direct lender of SBA 504 loans nationwide.
This guide is designed for entrepreneurs who are constructing or renovating a current business. If you need a loan to construct a new business from scratch, take a look at our guide to commercial real estate loans.
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How to Get a Small Business Loan.
Where to Get a Renovation or Expansion Loan
SBA 504 Loans
Bank Loans or
Lines of Credit
Online Loans or
Lines of Credit
Up to $13 million
Up to $5 million
Up to $500K
must create jobs
*10 % down payment
*20-30 % down
payment for a
loan (none for
a line of credit)
*30-35 % down
*10-30 % down
revenues over $30K
*In business for
at least 1 year
10 or 20 years
1 month -
owner occupied or
rates and low
Can be used
For line of
only pay interest
on used funds
Fast to approve
Low down payment
No down payment
Fastest to approve
projects over $250K
Loans are usually
for larger amounts
of capital (lines
of credit are
High down payment
Shorter loan terms
A wide range of lenders provide loans for business remodeling and renovation. The best option for you will depend on several factors, including your personal credit score, whether you have money to put down, how much money you want to borrow and how quickly, and on whether you own or lease the business property.
Business owners with owner-occupied properties should consider the following:
- SBA 504 loans – Low interest rates and 10 % down payment. Ideal for good credit borrowers and renovation projects over $500K.
- Bank equity financing – Like a home equity loan but taps into the equity in your business to give you a renovation loan or line of credit.
- Hard money loans – Ideal for lower credit borrowers but charge higher interest rates and require a larger 30-35 % down payment.
If you’re seeking to renovate leased property, you may have to do a bit more searching. Leasehold improvements are harder to finance because there’s no real estate to back the loan if the borrower defaults. You still have plenty of options though:
- SBA 7(a) loans – Low-rate government guaranteed loans that are good for larger projects. If there’s no real estate to back the loan, you need great personal credit and business revenues and at least 10 % down payment.
- Bank lines of credit – Ideal for those with good credit who want to do smaller scale or periodic renovations.
- Online loans and lines of credit – No down payment or collateral is required. These loans are also super fast and available to low credit borrowers. Be prepared to pay a higher interest rate however.
What Paperwork You’ll Need
Having the right documentation will help your renovation loan close quickly so that you can put the funds to work on your remodel.
Paperwork requirements vary from lender to lender and depending on loan size. For instance, if you’re doing just a small scale renovation (e.g. fixing a roof, putting in new flooring), you probably won’t need to work with an engineer or an architect. On the other hand, larger loans will require participation from such third parties plus city building permits and more.
Most online lenders are very light on paperwork, which is one thing that is attractive about them. Most other types of lenders, including banks, SBA lenders, and hard money lenders, will require the following documentation before closing on a renovation loan:
- A completed loan application
- Resumes and contact information for general contractor and (if using) engineer and architect
- Itemized budget for the remodel (you can create this with help from your general contractor)
- Blueprints and specifications for the remodel
- Draw schedule from the general contractor (this shows each phase of the renovation project, and the amount of money that will be needed at each phase)
- Copies of any applicable contracts, such as your contract with the general contractor
- Materials list showing what materials will be used for the renovation and their cost
- Any applicable permits or government fees that need to be paid before the renovation
- Statement of collateral
- Letter of consent from landlord if you are leasing the space to be renovated
- Last 3 years of business and personal tax returns
- Schedule of business liabilities and debts
- Recent business bank statements and income statements
- Personal financial statements
- Authorization to release personal credit
In-Depth Overview of Renovation & Expansion Loan Options
SBA 504 Loans
A 504/CDC loan issued by the U.S. Small Business Administration (SBA) can be used for renovating or making additions to existing business space. It’s a great option for small business owners because you can get 90 % financing and spread out your loan payments over 10 to 20 years.
There are 3 parts to an SBA 504 loan. A bank or direct lender provides 50 % of the loan, an SBA-approved Certified Development Company (CDC) provides 40 % , and the borrower puts up the remaining 10 % as a down payment. Since the CDC backs part of the loan and the real estate serves as collateral, 504 loans typically have interest rates under 5 %. However, because the banks are not making the whole loan, they generally don’t provide 504 loans for projects that are less than $250K.
At a minimum, in order to get approved for a 504 loan, your property must be at least 51 % owner occupied, and you must be able to show that the renovation is going to create jobs in the local community. You must also have great personal credit (above 650 in most cases), and your business’ cash flow should be in good shape.
Chris Hurn of Fountainhead Commercial Capital is a big believer in 504 loans for renovations because of the low 10 % down payment requirement. “This,” he says, “allows the business owner to preserve capital for their business down the line, which is important.”
In addition to direct renovation costs, soft costs (e.g. cost of the building permit, contractor fees, etc.) can be rolled into a 504 loan. Without this option, business owners have to pay the soft costs themselves, which can amount to thousands of dollars.
In theory, SBA 504 loans are available for smaller deals as well as multi-million dollar renovations. However, Hurn did say that most banks and 504 direct lenders usually focus on larger deals. For smaller scale projects, small business owners are better off using an alternate mode of financing or paying cash.
Conventional Bank Financing
If you’re not eligible for a 504 loan, conventional bank financing may be an economical alternative.
If you own your business location and hold a reasonable amount of equity in it, the bank may offer you an equity loan or equity line of credit. Typically, the bank will lend up to 70-75 % of the equity that you have in your property, with the remaining coming from you as a down payment. Calculating equity is simple: you take the market value of your business and subtract any outstanding commercial mortgages or liens. So if you have a retail space worth $500,000 and have $100,000 left to repay on your mortgage, your equity would equal $400,000. You would be able to get financing somewhere between $280K-300K.
Soft costs are usually your responsibility with an equity loan or line of credit. In order to qualify for one, you need to have strong personal credit. Interest rates are very competitive, similar to 504 loans.
Those who want to finance leasehold improvements will find it more difficult to get a bank loan because there’s no real estate collateral to back the loan. In such cases, Chris Hurn advises, ask your bank about a secured line of credit. Lines of credit are typically secured with a lien on inventory and receivables. You need good credit to qualify.
Lines of credit are also ideal for small, periodic facility improvements. With a line of credit, you only pay interest on money that you draw, and you can access the money (up to the maximum credit line) on an as needed basis. As you pay back what you borrow, your credit line goes back up. Bank lines of credit usually have a one year renewable term, and interest rates are around 4-5 %.
SBA 7(a) Loans
In contrast to 504 loans, which can only be used to purchase fixed assets, SBA 7(a) loans are general purpose working capital loans. They are partially backed by the U.S. government.
The proceeds of 7(a) loans can be used for renovations but also for other business reasons. So if you’re planning to renovate but also need financing for other purposes, such as hiring or marketing, an SBA 7(a) loan gives you a good deal of flexibility. As with a 504 loan, you typically can roll soft costs into a 7(a) loan.
SBA 7(a) loans are also a good option for small business owners who want to renovate leased space. As mentioned above, it’s very difficult to get a conventional bank loan for renovating leased property because there’s no real estate to serve as collateral. Lenders may, however, be willing to provide you with an SBA 7(a) loan for leasehold improvements because the government guarantee reduces the risk for the lender.
In order to get an SBA 7(a) loan for a leasehold renovation, you have to have excellent credit (above 650) and at least 10 % down payment (a higher down payment will increase your chances of getting approved). In addition to that, your business’ cash flow and Debt Service Coverage Ratio (ratio of your business’ net income to the overall debt level) need to be very positive to make up for the lack of real estate collateral.
Chris Hurn cautions small business owners who want to remodel leased business space. “If the landlord asks you to vacate,” he says, “all your efforts in renovating a business will go to waste, and you won’t benefit from the increased profits resulting from the renovation.”
Hard Money Loans
Hard money lenders are private lenders who provide loans secured by a hard asset, such as commercial real estate in the case of business renovation loans.
These lenders don’t have to follow many of the rules and regulations that apply to banking institutions. As a result, they are able to work with borrowers who are ineligible for bank and SBA loans or need a loan more quickly than a bank can process. For example, they are more comfortable working with lower credit borrowers and taking on risky projects, such as rehabilitation of distressed properties.
Hard money lenders focus primarily on the post-renovation value of the property, as opposed to its current value. If you’re able to, for instance, take a distressed property and convert it into a hotel with high income-generating potential, a hard money lender may be interested in giving you a loan.
Since they tend to work with less creditworthy borrowers and riskier projects, hard money lenders charge higher interest rates. Usually, the rates are around 10-13 %, but they can be even higher. Be wary of hard money lenders that require you to repay them with a portion of your credit card sales–such lenders are actually merchant cash advance providers, and the loan can cut deep into your profit margins.
In addition to higher interest rates, private lenders usually lend smaller amounts of capital. 65-70 % financing is typical, with the remainder coming from the borrower as down payment.
Online Marketplace Loans and Lines of Credit
Last but not least are online marketplace lenders. Examples include Funding Circle, OnDeck, Kabbage, Credibly, and Dealstruck. Like hard money lenders, online lenders are open to working with low credit borrowers, but they also offer additional benefits. Online loans and lines of credit don’t require you to make a down payment or put up collateral. Even if your credit is strong, you may want to consider online loans for the speed and convenience they offer–you can get funding in as little as 1 business day.
Marketplace lenders vary significantly in terms of the amount of financing they provide and the interest rates they charge. At the most, you can borrow about $500K with online loans and lines of credit, making these ideal for small to mid-sized renovation projects. The typical range of interest rates is 20-80 %, though an applicant with great credit can do better.
During my interview with Chris Hurn, he advised that small business owners should be careful about using costly marketplace financing, particularly to fund leasehold improvements. If a small business is forced by the landlord to change business locations, then there will be nothing to show for all the time and money sunk into a renovation project. This will make it hard to pay back the loan.
When it comes to renovating or making additions to a business, cost is usually the most important factor. It can be hard to predict the cost of a renovation because it depends on third parties, such as your general contractor. Moreover, the cost of lost business revenues while a renovation is underway is often hard to calculate. You will need to factor in such additional costs in addition to the direct cost of financing when determining your total cost of renovating.
Here are typical annual interest rates on a business renovation or expansion loan:
- SBA 504 Loans: 4 to 5 % APR
- Bank Loans and Lines of Credit: 4 to 5 % APR
- SBA 7(a) Loans: 6 to 7 % APR
- Private “Hard Money” Loans: 10 to 13 % APR
- Online Marketplace Loans and Lines of Credit: 20 to 80 % APR
To simplify, business renovation loan rates can be described in three tiers. SBA and bank loan rates tend to fall under 7 %. Rates on private “hard money” loans are in the low double digits. Online loans generally fall in the high double digits.
Large scale renovations usually have a significant amount of “soft costs.” Soft costs are any costs associated with a renovation other than labor and materials. With the exception of 504 loans, which can be used to finance soft costs, you typically must pay soft costs out of pocket. These include, but are not limited, to the following:
- General contractor fees
- Engineering and architecture firm fees (if using)
- Building permit fees and other licenses from local government (if needed)
- Environmental studies (if needed)
- Delivery fees on materials
In addition to these costs, there’s the cost of halting or limiting business while remodeling is underway. Before taking a loan, you need to make sure that the prospective monetary benefits from the renovation outweigh these costs.
What You Need to Get Approved
Qualification requirements vary based on the type of loan you get to finance your business remodel. Here’s a brief rundown on what you’ll need.
As with any business loan, personal credit score is a factor for renovation financing. The higher your credit score is, the more likely it is that you’ll get approved for a loan and the better rates you will qualify for. In order to get an SBA loan or a bank loan, you typically need a credit score above 650. Hard money lenders and online lenders will typically work with lower credit borrowers.
By putting money down on a renovation project, you signal to lenders that you are serious enough about the project to “put some skin in the game” and believe that the renovation will ultimately increase the property’s value.
SBA 504 loans require a 10 % down payment. Banks expect 20-30 % for equity financing and SBA 7(a) loans require anywhere from 10-30 %. Hard money lenders, since they take on riskier projects, tend to require a heftier 30-35 % down payment. If you can’t afford a down payment, you may have to opt for online lending, which typically offers 100 % financing.
Most lenders will not give you a renovation loan unless you provide some kind of collateral. In many cases, the business real estate serves as collateral. But if you don’t own the real estate outright (i.e. if you have an outstanding commercial real estate loan), you may not be able to use the real estate as collateral. In that case, says Chris Hurn of Fountainhead Commercial Capital, you have two options.
You can refinance with a new loan and incorporate the renovation plans into the new loan. Alternatively, you can provide something else as collateral, such as inventory or accounts receivable.
Most online lenders don’t require specific collateral, but most place a lien on your business assets. This gives them the right to repossess any business asset if you default on the loan.
Cash flow and other debt
Cash flow and debt level test your business’ ability to pay back a loan. Without sufficient revenue coming in, lenders will hesitate to loan money to your business. A renovation can actually slow down business and decrease revenues in the short term, so lenders want to make sure your business is in a strong financial position to begin with.
In addition, your business can’t have too much other debt. Your Debt Service Coverage Ratio (DSCR) can be calculated by dividing your business’ net operating income by its total debt payments. For instance, if your monthly debt payments are $5,000, and you have $10,000 in business income left over every month after all current business expenses are paid, your debt service coverage ratio would be 2. Ideally, your DSCR should be 1.25 or higher to convince lenders that you can comfortably pay back the loan.
Need some money for your business? Click here to get our FREE Guide:
How to Get a Small Business Loan.
Renovating and expanding your business can give it a much-needed facelift and accommodate business growth. Fortunately, you have a variety of loan options to make it happen.
Borrowers with owner-occupied property can get an SBA 504 loan, bank equity financing, or hard money loans. Those who lease business space can opt for an SBA 7(a) loan or online loan.
Whichever option you choose, make sure you evaluate the pros and cons of remodeling and find that the benefits to your business outweigh the costs.