Commercial real estate financing is categorically different from residential mortgages — different underwriting standards, different loan structures, different timelines, and significantly higher stakes. A business owner buying a $1.5M warehouse who chooses the wrong loan type could pay $300,000+ more in interest over the loan term than if they'd used the right structure. This guide cuts through the complexity and gives you a clear framework for understanding your options and making the decision that's right for your business.
The Main Types of Commercial Real Estate Loans
Conventional Commercial Mortgage
A standard commercial mortgage from a bank or credit union, typically requiring 20%–30% down, strong business financials, and 2+ years in business. Terms run 5–20 years with amortization periods of 20–25 years. Rates are typically 6.5%–9.5% depending on creditworthiness and market conditions. Most conventional commercial loans carry a balloon payment at the end of the term — meaning the remaining balance is due in full, requiring refinancing or sale.
SBA 504 Loan
The gold standard for owner-occupied commercial real estate purchases. The SBA 504 program provides up to 90% financing through a unique three-party structure: a conventional lender provides 50%, a Certified Development Company (CDC) provides 40% backed by the SBA, and you contribute just 10% down. Rates are fixed for 20–25 years at below-market levels. The catch: the property must be owner-occupied (you use at least 51% for your own business), and the approval process takes 45–90 days. For eligible businesses, the SBA 504 is almost always the best CRE loan available.
SBA 7(a) Loan for Real Estate
The SBA 7(a) program can also be used for commercial real estate, particularly for mixed-use purchases where real estate is one component of a broader acquisition (business + building). Maximum loan amount is $5 million. Terms up to 25 years for real estate. Rates are variable (Prime + 2.5%–3.75%). Unlike the 504, a 7(a) can cover non-owner-occupied property in certain circumstances and provides more flexibility in use of proceeds.
Bridge Loans
Short-term financing (6–36 months) used to bridge a gap — typically while a property is being stabilized, while permanent financing is being arranged, or when a time-sensitive purchase requires faster closing than conventional lenders can deliver. Bridge loans carry higher rates (8%–14%) due to their short duration and higher risk profile. They are a tool, not a solution — always have a clear exit strategy (sale, refinance, or conventional takeout) before entering a bridge loan.
Construction Loans
Used to finance the ground-up construction or major renovation of commercial property. Funds are disbursed in draws as construction milestones are completed. Interest is charged only on amounts drawn. After construction is complete, the loan converts to a permanent mortgage (construction-to-permanent) or is paid off with a conventional mortgage. Construction loans require detailed plans, contractor bids, and experienced developer/borrower credentials.
Loan Type Comparison at a Glance
| Loan Type | Down Payment | Rate Range | Term | Best For |
|---|---|---|---|---|
| Conventional Commercial | 20%–30% | 6.5%–9.5% | 5–20 yrs | Investment property, non-owner-occupied |
| SBA 504 | 10% | 6%–7.5% fixed | 20–25 yrs | Owner-occupied purchase; lowest long-term cost |
| SBA 7(a) | 10%–15% | Prime + 2.5%–3.75% | Up to 25 yrs | Mixed-use acquisition, flexible use of proceeds |
| Bridge Loan | 20%–35% | 8%–14% | 6–36 months | Fast closing, value-add, transitional property |
| Construction Loan | 20%–35% | 7%–12% | 12–24 months | Ground-up build or major renovation |
How Lenders Underwrite Commercial Real Estate
Commercial real estate underwriting evaluates both the borrower and the property. Unlike residential mortgages, the property itself — its income-generating capacity and condition — carries significant weight:
- Debt Service Coverage Ratio (DSCR): Net operating income ÷ annual debt service. Lenders typically require 1.25x minimum — meaning the property generates 25% more income than needed to cover the loan payment. For owner-occupied properties, the business's cash flow substitutes for rental income.
- Loan-to-Value (LTV): Based on an independent appraisal. Most lenders cap at 75%–80% LTV. Lower LTV = better rate and higher likelihood of approval.
- Borrower Credit: Personal credit 680+ preferred; 720+ for best rates. Business financials (2 years tax returns, P&L, balance sheet) reviewed alongside.
- Property Condition and Type: Lenders differentiate by property type. Warehouses, medical offices, and multi-tenant retail generally receive favorable treatment. Special-use properties (churches, car washes, restaurants) are harder to finance due to limited alternative use if the business fails.
Balloon Payment Risk: Most conventional commercial mortgages have a balloon payment at the end of the term — the remaining balance comes due in full. If you can't refinance at that point (due to market conditions, changed creditworthiness, or property value decline), you may be forced to sell. The SBA 504's fully amortizing 20–25 year structure eliminates this risk entirely for owner-occupied properties — which is one of the strongest reasons to use it when eligible.
The Bottom Line: If you're buying owner-occupied commercial property, exhaust the SBA 504 option first — the combination of 10% down, fixed long-term rates, and no balloon payment is unmatched in the market. If you're investing in non-owner-occupied property, conventional commercial lending with a 20%–25% down payment and a competitive rate is your primary path. Bridge and construction loans fill specific gaps but should never be treated as permanent solutions.
Buying or Refinancing Commercial Property?
Our advisors will identify the right loan structure, connect you with the right lenders, and guide you through every step of the commercial real estate financing process.
Talk to a CRE AdvisorSources & Further Reading
- SBA.gov — 504 Loan Program (Owner-Occupied Commercial Real Estate)
- Federal Reserve — H.15 Selected Interest Rates (Benchmark Rate Data)
- FDIC — Statistics on Depository Institutions (Commercial Real Estate Lending Data)
- CFPB — Mortgage Resources and Lending Disclosures
- U.S. Census Bureau — Construction Statistics & Data
External sources are provided for informational purposes. Business Loan Brokers is not affiliated with and does not endorse any government agency or third-party organization linked above.
