When it’s time to buy, build, or expand your business’s building, you’ll likely weigh two main financing paths: an SBA loan or a conventional commercial loan. Both can get you into a property, but they work very differently. The right choice depends on how much cash you want to keep in your business, how long you plan to own the property, and how quickly you need to close.
Here’s how an SBA 504 loan compares to a conventional commercial real estate loan.
Quick Comparison
- Down payment: SBA 504 is typically 10%. Conventional is commonly 20% to 30%.
- Rate type: The SBA 504 CDC portion carries a fixed rate for the life of the loan. Conventional loans often have rates that adjust or reset after a few years.
- Term: SBA 504 offers 10, 20, or 25 year terms on the CDC portion. Conventional loans often come due in 5 to 10 years, with a balloon payment.
- Occupancy: SBA 504 requires your business to occupy the property. Conventional loans can finance owner-occupied or investment property.
- Closing timeline: Conventional loans can close faster. SBA 504 loans involve two lenders and some added paperwork.
Down Payment: Keeping Cash in Your Business
This is often the deciding factor. With an SBA 504 loan, a bank covers about 50% of the project, a Certified Development Company (CDC) covers up to 40%, and you contribute as little as 10%. A conventional lender, carrying all the risk alone, usually wants 20% to 30% down.
That lower down payment means more working capital for hiring, equipment, inventory, and the unexpected. Learn more in our guide to the SBA 504 down payment.
Rates and Terms: Long-Term Stability
The CDC portion of an SBA 504 loan comes with a long-term fixed rate, so a large share of your financing won’t change as the market moves. That predictability makes budgeting much easier over the life of your loan.
Conventional commercial loans often have shorter terms with a balloon payment at the end, meaning you’ll need to refinance or pay off the balance in 5 to 10 years, at whatever rates are available then.
Curious what your payments could look like? Try our SBA 504 loan calculator.
Eligibility: Who Qualifies?
SBA 504 loans are designed for operating businesses that will occupy the property. Generally:
- Your business must occupy at least 51% of an existing building, or 60% of new construction.
- Your business must be a for-profit company that meets SBA size standards. Most small and mid-sized businesses qualify.
- The project should support economic development, such as creating or retaining jobs.
Conventional loans are more flexible on property type and use. They can finance investment properties and buildings you plan to lease out entirely, but they usually require stronger financials and a bigger down payment to offset the lender’s risk. Wondering how lenders size up an application? See what lenders actually look for.
Speed and Simplicity
A conventional loan involves a single lender, so it can often close faster with less paperwork. An SBA 504 loan includes a bank and a CDC, which adds a few steps. The good news is that an experienced CDC handles much of that coordination for you and keeps the process moving.
When an SBA 504 Loan Makes Sense
- You want to keep as much cash in your business as possible
- You plan to own and occupy the building for the long haul
- You value a long-term fixed rate and predictable payments
- You’re buying, building, expanding, or refinancing owner-occupied commercial property
When a Conventional Loan Might Be a Better Fit
- You’re buying an investment property you won’t occupy
- You need to close on a very tight timeline
- You have ample cash and prefer a single lender relationship
What About the SBA 7(a) Loan?
The SBA 504 isn’t the only SBA option. The SBA 7(a) program is more flexible in how funds can be used, while the 504 is built specifically for real estate and major equipment. See our breakdown of SBA 504 vs. SBA 7(a) to compare.
Talk Through Your Options
Every project is different, and the best financing depends on your goals. Learn more about the SBA 504 loan program, or contact Intermountain Business Lending to talk with our team about which path fits your business.