Business Ownership Coach | Investor Financing Podcast — When you are buying a business that includes real estate, the financing structure you choose will shape your cash flow, growth options, and long-term flexibility. In this guide I walk you through how to evaluate whether an SBA 7A, a CDC 504, or a combination of both makes the most sense. I will explain key differences, common structures, underwriting considerations, and practical strategies you can use to minimize monthly payments while preserving flexibility. If you want a direct strategy call after reading, go to bookwithbeau.com.

1. Assessing the Purchase Price Allocation

The very first question to answer when evaluating a business acquisition with real estate is simple: how much of the total purchase price is attributable to the real estate and how much is attributable to the business itself? That split determines which SBA product or combination of products will usually provide the best outcome.

If the majority of the purchase price is real estate, the 504 program often becomes attractive because it is designed to finance owner-occupied real estate with long-term, fixed-rate financing on the second portion of the loan. If the business portion is larger, then the SBA 7A might carry most of the deal, or you might use a mix where the 504 finances the real estate and a 7A finances the business acquisition.

Key practical point: lenders and advisors structure the debt to achieve the lowest possible monthly payment that still fits your objectives. That usually means stretching amortization on the real estate as far as the program allows and keeping payments affordable for cash flow reasons.

As the Business Ownership Coach | Investor Financing Podcast I often tell clients that the allocation is not just an accounting exercise. It affects amortization length, rate type, prepayment penalties, and even whether you can legally occupy enough space to qualify.

SBA Loan Options: 7A vs 504 — What You Need to Know

There are two core SBA loan programs most buyers consider for acquisitions that include real estate: the SBA 7A and the SBA 504. Each has strengths and tradeoffs.

• SBA 7A — Flexible. Can finance business acquisition, equipment, working capital, and real estate. Typical amortization on business-only portions is up to 10 years, and real estate portions can be amortized longer depending on lender structure. Prepayment penalty is typically shorter, often about 3 years depending on lender terms. Many 7A lenders are PLP (Preferred Lender Program) lenders who underwrite in-house, which speeds up the process.
• SBA 504 — Best for owner-occupied real estate where the real estate portion is a sizeable share of the transaction. It is structured as a first mortgage with a conventional lender and a second mortgage financed by a Certified Development Company (CDC) that becomes an SBA-backed debenture. The second is typically a 25-year fixed-rate debenture. Prepayment considerations can be more limiting, with longer mandatory periods often around 10 years tied to debenture terms.

Deciding between them often comes down to which piece of the purchase is larger and how important fixed long-term financing is for the real estate portion.

Remember this simple rule of thumb I use on the Business Ownership Coach | Investor Financing Podcast: if real estate dominates the purchase and you want long-term fixed-rate certainty, lean 504. If business value dominates or you need shorter prepayment exposure or more flexibility, lean 7A — or combine them.

Structuring the Deal: One Loan or Two Notes?

There are a few practical structures you will see in the marketplace:

1. Single 7A loan that covers both business acquisition and the real estate. Within that 7A you can have two notes: one amortized for the business (up to 10 years typically) and the other amortized for the real estate (potentially amortized out to 25 years depending on lender appetite).
2. Combined structure: 504 for the real estate and 7A for the business. The 504 gives you the 25-year fixed-rate debenture on the second, while the 7A covers the business purchase and any additional working capital or equipment.
3. All 7A when you want greater flexibility and a shorter prepayment penalty window. The 7A advantage is that prepayment penalties are generally around three years versus 10 years for some 504 debenture rules.

Why split notes? Because the objective is to lower monthly payments while matching amortization to asset life. Real estate can be amortized longer than goodwill or business intangible purchase price, so putting real estate on a longer amortization schedule reduces monthly cash outflow.

On the other hand, if the business purchase price far exceeds the real estate value, you cannot just amortize the combined total over 25 years. In that case the 7A's flexibility to split notes or to structure a combination often makes more sense.

As the Business Ownership Coach | Investor Financing Podcast I walk buyers through modeling these structures so they can see monthly payment differences, total interest, and how prepayment penalties affect an exit or refinance plan.

Underwriting, Eligibility and Occupancy Rules

Two other practical considerations are underwriting flow and eligibility rules.

• Occupancy. If the deal involves owner-occupied real estate, to qualify for SBA financing you generally must occupy at least 51 percent of the space. That is a hard eligibility threshold that influences whether a 504 loan can be used.
• Underwriting process. A 7A loan with a PLP (Preferred Lender Program) lender is typically a single underwriting process. The lender underwrites in-house and you can often avoid a separate SBA underwriting step, which speeds up approvals.
• 504 underwriting is a two-step process. The bank underwrites the first mortgage, and a CDC underwrites and packages the second mortgage to send to the SBA for the debenture. This can make 504 transactions slightly longer and more procedural, though they enable larger transactions and long-term fixed rates.

Understanding whether your lender is a PLP or requires SBA final underwriting can help set expectations on timeline and documentation requirements.

Prepayment Penalties and Interest Rate Considerations

Prepayment penalty design and current rates are critical to your decision.

Here are the main points:

• Prepayment penalty. 7A loans tend to have shorter prepayment penalty windows, often around three years. 504 loans, because of the debenture and secondary market considerations, can have longer prepayment arrangements that lock you in for longer periods (often up to 10 years for certain debenture events).
• Fixed vs variable. The 504 debenture piece is attractive because it becomes a long-term fixed-rate loan once the debenture is issued. Current debenture rates have been around the low to mid six percent range depending on market conditions; for example, debenture rates have hovered near 6.3 percent in recent cycles. The senior bank piece on a 504 is negotiated with your lender and can be structured to meet your needs.
• Refinance opportunity. If you currently have a variable-rate 7A loan, now may be a good time to explore refinancing to lower your margin and potentially extend term. Extending term reduces monthly payments and can improve cash flow. For a business-only 7A without real estate, the term is typically 10 years, so refinancing into a lower margin or into a new structure may be advantageous.

As the Business Ownership Coach | Investor Financing Podcast I caution buyers to align prepayment exposure with growth plans. If you expect to add value and refinance or sell within a short window, avoid long prepayment lockups.

Practical Examples and How I Walk Clients Through Deals

Here are a few quick scenarios I routinely model with buyers:

1. Small business with modest real estate value: Use an all-7A loan, split into two notes if necessary, to keep underwriting simple and prepayment penalties short.
2. Business acquisition where real estate is half or more of the purchase price: Use a 504 for the real estate to lock in a 25-year fixed rate on the second, and a 7A to finance the business purchase.
3. Large acquisition with significant construction or value add planned: Carefully weigh the 504's longer prepayment exposure versus the 7A's flexibility; sometimes the best path is a 504 for the core real estate and a 7A for the value-add work and working capital.

Across all scenarios, the goals remain the same: minimize monthly debt service, preserve upside for growth, and keep exit options open by managing prepayment penalties and amortization lengths.

If you would like hands-on help structuring a deal, I encourage you to book a strategy call. I walk clients through cashflow modeling, amortization impacts, prepayment scenarios, and lender options so they can make an informed choice.

Next Steps: Strategy, Timing and Where to Start

To recap the practical takeaways:

• Start by splitting the purchase price into business value and real estate value. That allocation drives most structural decisions.
• Consider a 504 when real estate dominates and you want long-term fixed-rate financing on the real estate piece. Expect a 25-year fixed debenture on the second and a more structured underwriting process.
• Consider a 7A when business value is high, when you need flexibility, or when you want shorter prepayment penalties. A PLP 7A lender can speed things up.
• Combining 504 for real estate and 7A for the business often provides the best of both worlds: long-term fixed real estate financing plus flexible business funding.
• Watch the occupancy rule: you typically must occupy at least 51 percent of the real estate to use SBA owner-occupied financing.

Finally, if you currently have a variable-rate SBA 7A, now is a good time to consider refinancing to lower your margin and extend the term to reduce monthly payments. If you are planning a business acquisition, use cashflow modeling to compare all structures and to understand prepayment exposure.

This content is part of my ongoing series where I help entrepreneurs think through financing and acquisition strategy. If you want a tailored walk-through of your specific deal, book a strategy call at bookwithbeau.com. I work with buyers to build a financing plan that matches their growth goals and exit timeline.

Thank you for reading. Remember the phrase that guides our approach: Business Ownership Coach | Investor Financing Podcast. I look forward to helping you close your next acquisition the right way.