For many business owners, the biggest hurdle to buying their own building isn’t the monthly payment. It’s the down payment. That’s exactly where the SBA 504 loan program shines. In most cases, you can buy or build commercial real estate with as little as 10% down, leaving more cash in your business where it can keep working for you.
Here’s how the SBA 504 down payment works, when it can be higher, and what you can use to cover it.
The Standard SBA 504 Down Payment Is 10%
An SBA 504 loan is split between three parties:
- A bank or private lender provides about 50% of the project cost in a first position loan.
- A Certified Development Company (CDC) like Intermountain Business Lending provides up to 40% through an SBA-backed second position loan.
- You, the business owner, contribute as little as 10%.
Because the bank only carries half the risk, and the SBA backs the CDC portion, lenders can offer terms that would be hard to get with a traditional commercial loan. Learn more about what a Certified Development Company does.
When the Down Payment Increases
There are two situations where the SBA requires a larger contribution:
New Businesses: 15%
If your business has been operating for less than two years, the required down payment typically increases to 15%.
Special Purpose Properties: 15%
Buildings designed for a single type of use, such as hotels, car washes, gas stations, bowling alleys, or medical facilities, generally require 15% down.
Both at Once: 20%
If you’re a newer business and purchasing a special purpose property, expect the down payment to be 20%.
Even at 20%, the SBA 504 program often requires less cash up front than conventional commercial real estate financing.
What Counts Toward Your Down Payment?
Your contribution doesn’t always have to come straight from your bank account. Depending on your project, it may include:
- Cash or business savings
- Equity in land you already own, which can often count toward a construction project
- Funds already invested in the project, such as eligible costs you’ve paid for site work or design
Every project is a little different, so it’s worth talking with a 504 lender early to understand what qualifies in your situation.
SBA 504 Down Payment vs. Conventional Loans
Conventional commercial real estate loans commonly require 20% to 30% down. That difference adds up quickly. On a $2 million building, putting 10% down instead of 25% keeps $300,000 in your business for payroll, equipment, inventory, or growth.
For a deeper side by side look, read our guide to SBA loans vs. conventional loans.
What Can an SBA 504 Loan Be Used For?
The low down payment applies to fixed assets that help your business grow, including:
- Purchasing an existing building
- Constructing a new facility
- Renovating or expanding a property you own
- Buying long-term equipment and machinery
- Refinancing eligible commercial real estate debt
To qualify for a real estate purchase, your business generally needs to occupy at least 51% of an existing building, or at least 60% of a newly constructed one.
How to Prepare for the Down Payment
If you are starting to think about an SBA 504 loan and want to get ahead of the down payment requirement, here is where to focus:
Start setting aside funds early. If you know a project is 12 to 18 months out, begin building a dedicated reserve now. Even modest monthly contributions add up significantly over a year or more.
Understand your total project cost, not just the purchase price. Down payment is calculated on the total project cost, which can include the purchase price, renovation costs, equipment, and certain soft costs like fees and closing costs. Make sure you are budgeting against the right number.
Talk to your CDC early. A CDC can give you a realistic estimate of your down payment requirement based on your business’s age, the type of property, and your project scope — often before you have even identified a specific property. This lets you plan with real numbers instead of guesses.
Consider timing relative to your two-year mark. If your business is approaching its two-year anniversary and you are weighing whether to wait, even a few months can make a meaningful difference in your down payment requirement if it moves you from startup to established status.
A Quick Example
Here is how the down payment requirements play out on a $2 million project:
An established business (more than two years old) purchasing a standard office building: 10 percent down, or $200,000.
A startup purchasing the same standard office building: 15 percent down, or $300,000.
An established business purchasing a special-purpose property like a hotel: 15 percent down, or $300,000.
A startup purchasing a special-purpose property: 20 percent down, or $400,000.
The difference between the lowest and highest scenario is $200,000 on the same $2 million project — which is why understanding which category your business and project fall into matters early in the planning process.
See What Your Payment Could Look Like
Want to see how a 10% down payment fits your plans? Try our SBA 504 loan calculator to estimate your monthly payment, then learn more about the SBA 504 loan program.
Ready to talk through your project? Contact Intermountain Business Lending. Our team will help you understand exactly what you’ll need to bring to the table.