Buying commercial real estate requires choosing between SBA 504 (10% down, fixed 20-year rate), SBA 7(a) (flexible, $5M cap), and conventional CRE (20-30% down, 1.25x DSCR). Here's how each path works.
Small businesses can buy commercial property through SBA 504 (10% down, fixed CDC rate for 20–25 years), SBA 7(a) (up to $5M, single-lender close), or conventional CRE loans (20–30% down, 1.25× DSCR minimum). All three require a personal guarantee from owners with 20%+ equity. SBA programs restrict financing to owner-occupied properties. Close timelines run 45–90 days for SBA, 30–60 for conventional.
Small businesses that have stabilized their operations often face a pivotal question: continue leasing commercial space, or acquire it? The math shifts toward ownership when your location is long-term, your revenue is predictable, and lease renewals are uncertain. The Federal Reserve's 2024 Small Business Credit Survey identifies real estate among the top capital priorities for employer firms — behind only working capital and equipment financing.
But commercial real estate (CRE) loans work differently from most business financing. They require higher down payments, longer underwriting timelines, and personal guarantees that standard business loans may not. This guide covers the three main paths — SBA 504, SBA 7(a), and conventional CRE — so you can enter the process knowing what to expect.
The SBA 504 loan program is designed specifically for long-term, fixed-asset acquisition — commercial real estate first, major equipment second. The structure involves three parties:
The CDC portion maxes at $5.5 million for most businesses, rising higher for manufacturing facilities and qualifying energy projects. On a $2 million building, the math looks like: $1 million from the bank, $800,000 from the CDC, and $200,000 from the business — a 10% down payment that conventional CRE lending rarely matches.
The owner-occupancy rule: SBA 504 requires you to occupy at least 51% of an existing building's total square footage (60% for new construction). A medical practice buying a building and using 55% for the clinic qualifies. A property investor purchasing space entirely for rental income does not.
Rate and terms: The bank portion carries whatever rate the participating lender sets — typically tied to SOFR or Prime. The CDC debenture is fixed for 20 or 25 years (20 years for equipment projects; 20 or 25 for real estate), with the rate set monthly by SBA based on current Treasury yields plus a spread. That locked rate is a meaningful structural advantage over conventional adjustable-rate commercial loans.
Close timeline: 45–90 days. SBA processing, third-party appraisal, environmental review, and CDC underwriting all layer together. On a first 504 transaction, plan for the full 90 days.
See SBA 7(a) vs. SBA 504 for a side-by-side comparison of both programs.
The SBA 7(a) loan program is the SBA's general-purpose product — real estate is an eligible use, but it's not the program's primary design. That distinction matters in practice.
What 7(a) offers for real estate: - Terms up to 25 years on SBA-guaranteed real estate portions - Maximum loan of $5 million per loan - Single-lender structure — one loan, one closing, no CDC as a second party - Rates can be fixed or variable (SBA caps allowable spreads above Prime)
When 7(a) makes sense over 504: - The property is valued under $5M and a single-lender close matters - Your owner-occupancy percentage is lower than 504's 51% floor - The transaction needs to close faster than a CDC timeline allows - You're combining real estate with working capital in one loan (504 is real-estate-only)
The ceiling constraint: For purchases above $5M total, 7(a) alone won't cover it. You'd need a conventional first lien plus a 7(a) second, or the 504 layered structure.
Banks and commercial lenders operating without SBA backing have their own underwriting framework. This path fits investment properties without an occupancy requirement, larger deals that exceed SBA ceilings, or situations where the business doesn't meet SBA size standards.
Typical requirements: - Loan-to-value (LTV): 70–80%, meaning 20–30% down payment - Debt Service Coverage Ratio (DSCR): 1.25× minimum — the property's net operating income must equal at least 125% of annual debt service. See how to calculate DSCR for the step-by-step formula. - Amortization: 20–25 years, often with a 5- or 10-year balloon payment and a reset or refinance required at maturity - Rate: Tied to the 10-year Treasury plus a lender spread, typically 150–300 basis points above Treasury
What matters most to conventional lenders: For investment properties, the property's income history and projected NOI drive the analysis. For owner-occupied deals, business cash flow and financial history carry more weight. See what lenders actually look for in your financials for the documentation checklist.
Every SBA 504 loan, SBA 7(a) loan, and most conventional CRE loans require a personal guarantee from all owners holding 20% or more of the business. For SBA programs this is a program-level requirement, not a lender preference. The guarantee makes owners personally liable for the outstanding balance if the business defaults — it's the mechanism that enables lower down payments and government-backed terms.
There is no practical path to avoid a personal guarantee on a commercial real estate loan if you own a meaningful stake. Read the full guide on personal guarantees on business loans before signing.
Two alternatives are worth understanding if the qualification bar or capital requirement isn't there yet:
Home equity: Business owners who've built equity in their primary residence sometimes use a HELOC or cash-out refinance to fund a commercial property down payment. The access and rate can be better than alternatives, but the risk is real — you're pledging your home to the business. See using home equity to fund your business for a full breakdown.
SBA Express: For smaller renovations or improvements to leased commercial space, an SBA Express loan (up to $500,000, faster turnaround than standard 7(a)) can cover the gap without a purchase transaction. See the SBA Express loan guide.
For SBA 504 and 7(a) programs, most participating lenders require a minimum personal credit score of 680–700, with 720+ giving better rate access. Conventional CRE lenders typically want 700+, plus at least two years of business operating history. See credit score guidance for SBA loans.
The CDC (SBA-backed) portion caps at $5.5M for most businesses. Since the CDC covers 40% of the total project cost, a $5.5M CDC debenture implies a total project of roughly $13.75M ($5.5M CDC + $6.875M bank first + $1.375M borrower equity). Most small businesses are constrained by DSCR and lender appetite before hitting the program ceiling.
Debt Service Coverage Ratio = Net Operating Income ÷ Annual Debt Service. A 1.25× DSCR means the property generates $1.25 for every $1 in loan payments. Most CRE lenders require 1.25× minimum; some want 1.35× for higher-risk property types like hospitality. For owner-occupied properties where the business is the only tenant, lenders use projected business revenue in place of rental income.
SBA 504 has size eligibility thresholds: net worth under $15M and average net income under $5M for the prior two years, per SBA 504 eligibility requirements. Lenders underwrite the business's capacity to service the combined debt. Startups face a 15% down payment floor and tighter approval criteria compared to established businesses.
SBA 504 typically runs 45–90 days — SBA processing, third-party appraisal, environmental review, and CDC underwriting all layer together. SBA 7(a) runs 30–60 days through Preferred Lender Program banks, up to 90 for standard processing. Conventional CRE runs 30–60 days. The main bottleneck is usually documentation, not lender processing time.