SBA 504 vs Conventional Commercial Real Estate Loan

Buying commercial real estate for your business is a major decision. The SBA 504 program offers attractive terms — low down payments, fixed rates, long terms — but with strings attached. Conventional commercial loans offer more flexibility but typically require more cash upfront.

Here is how to decide between them.

Quick Comparison

Factor	SBA 504	Conventional Commercial
Down Payment	10-15%	20-30%
Interest Rate	Fixed (current ~5.5-7%)	Variable or Fixed (6-9%)
Term	20-25 years	5-20 years, often balloon
Max Loan Amount	$5.5M (up to $16.5M manufacturing)	No cap
Processing Time	60-90 days	30-60 days
Occupancy Requirement	Must occupy 51%+	No requirement
Fees	Higher upfront	Lower upfront
Prepayment Penalty	10 years declining	Varies, often 3-5 years

How SBA 504 Works

The SBA 504 has a unique structure with three parties funding the purchase:

First mortgage (50%): Bank or credit union provides conventional loan for half the project
Second mortgage (40%): CDC (Certified Development Company) provides SBA-backed debenture
Down payment (10%): You contribute the remaining 10%

The CDC Component

The CDC portion is where the magic happens. It is a 20-25 year fully amortizing loan with a fixed rate set at Treasury yields plus a spread. This rate stays fixed for the entire term.

When SBA 504 Wins

SBA 504 is usually better when:

Cash conservation matters — 10% down vs 25% down frees significant capital
Rate certainty is important — Fixed rate for 20-25 years eliminates rate risk
Long-term ownership planned — The longer term reduces monthly payments
You will occupy the building — Must occupy 51% or more
Project cost under $5.5M — Within standard SBA 504 limits
Time is flexible — Can wait 60-90 days for processing

When Conventional Wins

Conventional commercial loans work better when:

Investment property — SBA 504 requires owner occupancy
Speed is critical — Conventional can close faster
Project exceeds SBA limits — Larger purchases need conventional
You want to sell soon — SBA prepayment penalties hurt short holds
Building is specialized — Some property types do not fit SBA guidelines
Simpler process preferred — One lender instead of bank plus CDC

The Math: $2 Million Purchase

Compare a $2,000,000 building purchase:

Factor	SBA 504	Conventional	Difference
Down Payment	$200,000 (10%)	$500,000 (25%)	SBA saves $300K cash
Loan Amount	$1,800,000	$1,500,000	Higher loan with SBA
Rate	6.5% fixed	7.5% variable	SBA 1% lower
Term	25 years	20 years (5-yr balloon)	SBA longer
Monthly Payment	~$12,200	~$12,100	Similar
5-Year Interest	~$550,000	~$520,000	Conventional slightly less
Prepayment Year 5	~$45,000 penalty	~$15,000 penalty	Conventional less

Down Payment Deep Dive

The down payment difference is often the deciding factor:

Purchase Price	SBA 504 (10%)	Conventional (25%)	Cash Saved
$500,000	$50,000	$125,000	$75,000
$1,000,000	$100,000	$250,000	$150,000
$2,000,000	$200,000	$500,000	$300,000
$5,000,000	$500,000	$1,250,000	$750,000

What to Do With the Savings

The cash you save on down payment could fund equipment, hiring, marketing, or reserves. Consider the opportunity cost of tying up that capital in real estate.

The Prepayment Question

SBA 504 has significant prepayment penalties that decline over 10 years:

Year 1: Approximately 7% of remaining CDC portion
Year 5: Approximately 5% of remaining CDC portion
Year 10: Approximately 1%
After Year 10: No penalty

Plan for the Long Term

If you might sell or refinance within 5 years, SBA 504 prepayment penalties could cost tens of thousands. Conventional loans typically have shorter or no prepayment restrictions.

Processing Reality

Milestone	SBA 504	Conventional
Initial Application	1-2 weeks	1 week
Underwriting	3-4 weeks	2-3 weeks
SBA/CDC Approval	2-3 weeks	N/A
Closing	2-3 weeks	1-2 weeks
Total	60-90 days	30-45 days

Real Scenarios

Scenario 1: Established Business, Long-Term Hold

Situation: You have run your manufacturing business for 15 years and want to buy a $3M facility. You plan to operate there indefinitely.

Best choice: SBA 504. Low down payment preserves capital for equipment. Fixed rate removes uncertainty. Long term means no balloon payment surprises.

Scenario 2: Growth-Stage Company, Uncertain Future

Situation: Your 3-year-old company is growing fast. You want to buy a building but might need a bigger space in 4-5 years.

Best choice: Conventional. SBA prepayment penalties would hurt if you sell in 4 years. Conventional gives you flexibility to sell or refinance without significant penalty.

Bottom Line

SBA 504 wins on down payment and rate certainty for long-term owner-occupants. Conventional wins on speed, flexibility, and short-term exits. Match the loan to your timeline.

Talk to Both

Start conversations with both a conventional lender and an SBA-approved CDC at the same time. Compare actual quotes, not just general terms. The right answer depends on your specific deal.