Commercial Real Estate Loans: Buy the Building
Buying the building your business operates from runs on three paths: an SBA 504 or 7(a) at about 10% down, or a conventional commercial mortgage at 20% to 35% down. The first filter is the 51% owner-occupancy rule, the real decider is cash versus monthly payment, and the detail nobody mentions is the balloon sitting on the bank half of a 504.
Bottom line
Finance an owner-occupied commercial building through an SBA 504 or 7(a) at about 10% down, or a conventional mortgage at 20% to 35% down. SBA programs require your business to occupy at least 51% of the building. On a $1,000,000 purchase, the 10%-down SBA route keeps roughly $150,000 more cash in your business than a 25%-down conventional loan, at the cost of a higher monthly payment. Pick by how long you will hold and how badly you need that cash, not by the lowest monthly number.
Owner-occupied or investment? Answer that first
Everything about a commercial real estate loan branches off one question: will your business occupy the building, or are you renting it out? If your company will use at least 51% of an existing building, the best financing in the country is open to you, the SBA programs built for operators who buy their own space. If the building is mostly leased to tenants, you are an investor in the eyes of a lender, and that is a different, more expensive loan.
This guide is about the first case: the owner who has been writing a rent check for years and does the math on buying instead. It is often the right move. You stop funding a landlord’s mortgage, you lock in your location, and the payment builds equity you own. The question is never whether to buy so much as how to finance it, and there are three real paths, each with a different down payment, a different rate structure, and a different risk you carry for the next decade.
One thing to settle up front. A commercial building is a long-term asset, so it wants long-term money. Do not try to buy real estate with a short-term working-capital product or a daily-debit advance. The repayment starts immediately while the value of owning the space plays out over twenty years, and that mismatch is one of the classic funding mistakes that cost the most. Real estate means a mortgage, SBA or conventional, for almost everyone who is not paying cash.
The three paths, and what each one is for
Two SBA programs and one conventional loan cover nearly every owner-occupied deal. They are not ranked best to worst. They solve different problems, and the right one depends on your cash, your timeline, and whether the project is more than just the purchase.
Reference current as of October 2026. Figures are typical marketplace ranges, vary by lender and by state, and are no guarantee of approval. Verify current terms before relying on any number.
Owner-occupied purchase, keep the most cash
Product
SBA 504
Typical terms
10% down, 25-year fixed debenture
The default for an operator buying the building they work in. A 504 stacks a 50% bank first mortgage, a 40% fixed-rate SBA debenture through a Certified Development Company, and your 10% down. The debenture is locked for 25 years with no balloon, and the low down payment is the whole appeal: on a $1,000,000 building you put in $100,000 instead of a quarter million. You must occupy at least 51% of an existing building, and the file takes 60 to 90 days.
Owner-occupied purchase that needs flexibility
Product
SBA 7(a)
Typical terms
10% down, up to 25-year term, rate floats
One loan, one lender, up to $5 million, often used when the deal needs working capital or a build-out alongside the real estate that a 504 cannot fund. The rate is variable, Prime plus 2.25% to 4.75%, so the payment moves with Prime over the life of the note. It closes faster than a 504, usually 45 to 60 days, and carries no balloon. The same 51% occupancy rule applies.
You have cash and want a simple, fast loan
Product
Conventional commercial mortgage
Typical terms
20% to 35% down, 5-to-10-year balloon
A single bank note with no SBA layer, no occupancy floor, and no size-standard test. It closes faster, around 40 days, and the paperwork is lighter. The price is a bigger check at closing and a balloon: the loan amortizes over 20 to 25 years but the term ends in 5 to 10, when the full remaining balance comes due and you refinance into whatever rates exist that year. It is also the only path for a building that is mostly leased to tenants.
Ground-up construction or a major renovation
Product
SBA 504 or construction-to-permanent
Typical terms
10% to 15% down, converts to a long fixed term
Building new or gutting a shell is a construction loan that converts to permanent financing once the certificate of occupancy lands. A 504 funds ground-up construction inside its normal structure, though new construction carries a 60% initial occupancy test rather than 51%, with a plan to reach 80% over time. Budget for carrying costs and a timeline measured in quarters, not weeks.
The two SBA programs sit so close together that choosing between them is its own decision. The SBA 7(a) vs 504 comparison works the blended-rate math, and the 504 vs conventional mortgage breakdown weighs the 10%-down structure against a bank loan on cash, rate certainty, and balloon risk.
A $1,000,000 building, three ways
Numbers make the tradeoff concrete. Take one generic building at a million dollars and run it through each path. The arithmetic below is illustrative, so re-run it with a real quote and today’s rates, but the shape of the decision holds.
Conventional, 25% down
$250,000 in
On a $1,000,000 building, 25% down and $750,000 financed at an illustrative 8.0% over a 25-year amortization with a 10-year balloon runs about $5,790 a month. It is the lowest monthly of the three, but it takes the most cash at closing and leaves a roughly $605,000 balance that comes due at year 10 and has to be refinanced at whatever rate the market offers then.
SBA 504, 10% down
$100,000 in
The same building financed as a $500,000 bank first mortgage near 7.5% plus a $400,000 CDC debenture fixed near 6.95%, both over 25 years, runs about $6,510 a month combined. The payment is higher than the conventional one because you are financing $900,000 instead of $750,000. The debenture rate is locked for the full 25 years with no balloon.
SBA 7(a), 10% down
$100,000 in
The whole $900,000 in one loan at an illustrative 10.25%, Prime plus a spread, over 25 years runs about $8,340 a month. You get one loan, a faster close than a 504, and no balloon. The catch is the floating rate: every one-point move in Prime shifts the payment, so on a long hold you are carrying real rate risk the 504 debenture does not have.
The cash that stays in the business
$150,000
This is the number that decides most owner-occupied deals. A 10%-down SBA structure leaves $150,000 more in your operating account than a 25%-down conventional mortgage on a $1,000,000 building. Whether that is worth a higher monthly payment turns on one honest question: how hard is your business working the cash it already has?
The test every one of these has to pass
Whichever path you pick, the lender runs the same test. It wants the building and the business together to produce about 1.20 to 1.25 times the new mortgage payment in free cash flow. On the SBA 504 payment of roughly $6,510 a month, near $78,000 a year, that means showing around $94,000 to $98,000 of provable annual cash flow after a market owner’s salary. If the returns show it, the deal pencils. If existing debt is eating the coverage, clean that up first, because the real-estate file will not pencil around it.
That 10% figure is the standard SBA injection, and how it works, including when it climbs to 15%, is covered in the SBA down payment guide. If the building comes attached to buying the whole business rather than a standalone purchase, the guide to financing a business purchase sits one level up and covers how the real estate folds into the acquisition.
Three things the brochure leaves out
The details that decide whether the loan you signed is the loan you thought you signed.
The product pages make all three paths sound clean. On a real deal, a few things move the decision that most guides skip entirely. Here are the ones that matter, in the order they tend to surprise buyers.
The 504 'no balloon' promise only covers 40% of the deal
Marketing calls the SBA 504 a no-balloon loan, and that is true of the 40% CDC debenture, which is fixed and fully amortizing for 25 years. The 50% bank first mortgage is a separate note with its own terms, and plenty of banks write their piece on a 10-year term with a reset or a balloon. So on a 504 you can still face a refinance on roughly half the project at year 10. Ask the bank directly whether its first mortgage is fixed for the full term before you treat the whole loan as balloon-proof.
The 51% occupancy rule is the first gate, not a footnote
SBA financing exists for operating businesses, not landlords. Your business must occupy at least 51% of an existing building (60% for new construction) for a 504 or a 7(a) to touch it. Buy a building where your shop fills 40% and tenants fill the rest and both SBA programs decline it at intake, no exceptions. That building is a conventional investment-property file at a higher down payment and rate. Decide your occupancy share before you fall in love with a listing.
The monthly payment is a trap if you read it alone
The conventional mortgage shows the lowest monthly payment of the three paths, and that is exactly why owners pick it for the wrong reason. The lower payment exists because you financed less, which means you handed over more cash at closing and signed up for a balloon. Compare the paths on total cash out, rate certainty, and refinance risk together, not on the monthly line alone, or you will optimize the one number that matters least.
None of this makes any one path wrong. It makes the comparison honest. To see exactly how lenders turn your cash flow into a maximum loan amount and what a file needs at intake, the SBA qualification walkthrough lays out the coverage math that sets your ceiling.
What controls the close, beyond the loan
An approval is not a closing. Three things outside the credit decision decide when, and sometimes whether, a commercial real estate deal funds. Get all three moving before you spend serious money on diligence.
The appraisal and the loan-to-value set the real ceiling
The lender lends against the appraised value, not the contract price. If the appraisal lands below your agreed price, the gap comes out of your pocket on top of the down payment. Commercial appraisals take two to four weeks and cost real money, and on an income-producing property the appraiser weighs rent and cap rates, not just comparable sales. Order it early, because it sits squarely on the critical path to closing.
Environmental review can stop a deal cold
A Phase I environmental site assessment is standard on commercial real estate and effectively mandatory on anything with a fuel, dry-cleaning, auto, or industrial history. If the Phase I flags a concern, a Phase II with soil and groundwater testing follows, and that can add weeks and kill marginal deals. SBA files are especially strict here. Pull the property history before you spend on the appraisal.
Debt-service coverage decides how much you can borrow
A commercial lender wants the property and the business together to throw off about 1.20 to 1.25 times the new mortgage payment in free cash flow. That coverage test, not the sticker price, sets your real budget. Existing high-cost debt eats directly into it, which is why owners carrying daily-debit advances often have to clean up the balance sheet before a real-estate file will pencil.
Special-purpose properties carry heavier versions of these gates. A gas station or c-store brings a near-automatic tank assessment, and a hotel or motel layers a brand-mandated renovation reserve on top of the real estate. Both also sit at the 15%-down tier rather than 10%, because the SBA treats single-use property as higher risk.
How to line the deal up before you apply
The difference between a sixty-day close and a stalled one is almost always preparation, not the lender. Four moves clear the gaps that actually hold up a commercial real estate file.
Settle the occupancy question first
Before anything else, work out what share of the building your business will actually occupy. At 51% or more of an existing building, SBA 504 and 7(a) are open to you. Below that, you are buying investment property on conventional terms. This single fact picks your product, your down payment, and your rate, so answer it before you tour a second listing.
Pull two years of returns and a current rent roll
A commercial real estate file runs on two years of business and personal tax returns, a year-to-date profit and loss, a business debt schedule, and, if any part of the building is leased, a rent roll and the tenant leases. Having these in hand up front is the single biggest thing that moves a close from ninety days toward sixty.
Price the whole capital stack, not just the down payment
The down payment is not the only cash the deal needs. Budget for the appraisal, the Phase I, title and legal, and a reserve for the first slow quarter after you close. On an SBA 504, most of the CDC and SBA fees finance into the loan rather than coming out of pocket, which is a genuine cash advantage worth confirming in writing.
Match the structure to how long you will hold
If you plan to own the building for two decades, rate certainty and low cash out favor an SBA path, and the balloon on a conventional loan is a liability. If you expect to sell or move within five to seven years, a conventional loan's simpler single note and lighter structure can win even at a higher headline rate, because the balloon never arrives on your watch.
If the building also needs new equipment or a build-out that the real estate loan will not cover, finance those separately on their own terms rather than stretching the mortgage, a split the equipment financing page and the business loan requirements guide both lay out by product.
See what your building purchase qualifies for
One 2-minute application reaches 300+ lenders, including SBA Preferred Lenders who handle 504 and 7(a) real estate and conventional commercial mortgage lenders. It is a soft credit pull, so checking has no impact on your score and there is no obligation to take any offer.
Frequently asked questions
What credit score and down payment do I need for a commercial real estate loan?
For an SBA 504 or 7(a) on an owner-occupied building, plan on a personal credit score around 680, two years in business, and a 10% down payment (15% on special-purpose property such as a hotel or restaurant, or when the business is under two years old). A conventional commercial mortgage usually wants 20% to 35% down and a similarly strong file. In every case the lender sizes the loan off debt-service coverage, so provable cash flow matters as much as the score.
Can I use an SBA loan to buy a building I will rent out to tenants?
No. SBA 504 and 7(a) financing requires your business to occupy at least 51% of an existing building, or 60% of new construction. A property that is mostly leased to third parties is investment real estate and categorically ineligible for SBA programs at intake. That purchase runs on a conventional commercial mortgage instead, which carries no occupancy floor but asks for a larger down payment, typically 25% to 35%, and a higher rate.
Is an SBA 504 really a no-balloon loan?
Only the 40% SBA debenture is. That portion is fixed and fully amortizing for 25 years with no balloon. The 50% bank first mortgage is a separate note, and many banks write it on a 10-year term with a reset or balloon. So on a 504 you can still face a refinance on nearly half the project a decade in. Ask the bank whether its first mortgage is fixed for the full term before you treat the whole structure as balloon-proof.
SBA 504 or SBA 7(a) for buying my building?
Use a 504 when the deal is purely the real estate and you want the lowest fixed cost on a long hold, since the 40% debenture locks a rate for 25 years. Use a 7(a) when the purchase needs working capital or a build-out the 504 cannot fund, or when a 45-to-60-day close matters more than the rate. Many operators run both: a 504 for the building and a 7(a) for the operating side. The SBA 504 versus conventional and 7(a) versus 504 comparisons work the tradeoffs in detail.
How long does it take to close a commercial real estate loan?
A conventional commercial mortgage closes fastest, often around 40 days. An SBA 7(a) runs 45 to 60 days, and an SBA 504 runs 60 to 90 days because two underwriting tracks, the bank's first mortgage and the CDC's debenture, have to clear in parallel. The appraisal and the Phase I environmental review sit on the critical path for all three, and a flagged environmental issue can add weeks, so start both early if you are racing a deadline.
Why is the monthly payment on a 504 sometimes higher than a conventional loan?
Because you finance more of the purchase. At 10% down you borrow 90% of the building; at 25% down on a conventional loan you borrow only 75%. The larger balance means a larger payment even though the 504's blended rate is usually at or below the conventional rate. The tradeoff is the cash you keep: a 10%-down structure can leave six figures more in your operating account, which is the entire reason owners accept the higher monthly payment.
Quick Loans Direct is a lending marketplace, not a direct lender. Actual rates, terms, and approval decisions are made by our lending partners based on their individual underwriting criteria and vary by borrower, product, property, and business financials. The figures shown here are typical marketplace ranges, not guarantees of approval. Rates and terms may vary by state. California, New York, Virginia, Utah, Georgia, Connecticut, Florida, Kansas, and several other states require specific commercial-financing disclosures that your chosen lender will provide. SBA program rules, including occupancy and eligibility requirements, are set by the U.S. Small Business Administration and are subject to change.
This content is for informational purposes only and does not constitute financial, tax, or legal advice. Consult a qualified professional before making business financing decisions. Last reviewed by the Quick Loans Direct editorial team on October 2026.