Small business owners looking to purchase commercial real estate or heavy equipment face a critical decision: pursue a conventional commercial mortgage or an SBA 504 loan. 

While both options can help you acquire valuable assets, their long-term cost implications differ significantly.

Down Payment Requirements: Initial Capital Impact

The initial capital requirement creates one of the most significant differences between these financing options:

Commercial Mortgages: Typically require 20-30% down payment

• For a $1,000,000 property: $200,000-$300,000 upfront
• Higher initial expense
• More capital tied up immediately

SBA 504 Loans: Require only 10% down payment

• For a $1,000,000 property: $100,000 upfront
• Preserves $100,000-$200,000 in working capital
• Allows businesses to retain cash for operations or growth

This substantial difference in down payment affects not just your initial costs but your entire business cash flow strategy.

Loan Structure and Terms

Understanding the fundamental structure of each loan type helps explain their long-term cost differences:

Commercial Mortgages:

• Typically one loan from a single lender
• Terms generally up to 10 years (often with balloon payments)
• Amortization may extend to 20-25 years
• Can have fixed or variable interest rates

SBA 504 Loans:

• Two-loan structure:
  
  • 50% from a conventional lender (first position)
  • 40% from a CDC/SBA (second position)
  • 10% from the borrower (down payment)
• Terms of 10, 20, or 25 years with no balloon payments
• Fixed interest rates for the SBA portion
• First mortgage may have fixed or variable rates

Interest Rates and Monthly Payments

Interest rates directly impact your monthly payments and total cost over the life of the loan:

Commercial Mortgages:

• Variable rates typically ranging from 5-6%
• Rates may increase over time, making long-term costs less predictable
• Higher monthly payments due to shorter terms
• Example: $750,000 loan at 6% for 10 years ≈ $8,270/month

SBA 504 Loans:

• Fixed rates tied to 10-year Treasury yields plus an increment
• As of April 2025, rates for 25-year debentures: 6.437%
• Lower monthly payments due to longer terms
• Example: $900,000 loan at 5% for 25 years ≈ $4,836/month

The fixed rate on SBA 504 loans provides certainty for long-term financial planning, while commercial mortgages may expose borrowers to interest rate risk.

Fees and Closing Costs

Both loan types involve various fees, but they're structured differently:

Commercial Mortgages:

• Closing costs typically range from 2-5% of the loan amount
• Paid upfront at closing
• Key fees include:
  
  • Lender's processing/underwriting: $500-$2,500
  • Appraisal: $1,000-$10,000
  • Environmental reports: $2,000-$6,000
  • Title insurance: $2,500-$15,000
  • Lender's origination points: 0-2%
  • Legal fees: Varies based on complexity

SBA 504 Loans:

• Most fees are financed into the loan amount
• Approximately 2.9% of the SBA portion
• Key fees include:
  
  • SBA guarantee fee: 0.5% of SBA portion
  • CDC processing fee: 1.5% of SBA portion
  • Funding fee: 0.25% of SBA portion
  • Underwriters' fee: 0.4% of SBA portion
  • Closing costs: Approximately $2,500

The ability to finance fees with SBA 504 loans reduces initial out-of-pocket expenses, though it increases the total amount borrowed.

Total Cost Comparison

When analyzing total long-term costs, consider these components:

Commercial Mortgages:

• Higher down payment: More capital committed upfront
• Lower total interest paid due to shorter terms
• Example: $750,000 loan at 6% for 10 years
  
  • Total payments: ≈ $992,400
  • Total interest: ≈ $242,400

SBA 504 Loans:

• Lower down payment: Less capital committed upfront
• Higher total interest paid due to longer terms
• Example: $900,000 loan at 5% for 25 years
  
  • Total payments: ≈ $1,450,800
  • Total interest: ≈ $550,800

While SBA 504 loans typically result in higher total interest paid over the life of the loan, they offer lower monthly payments and preserve working capital.

Strategic Considerations

Beyond pure numbers, consider these strategic factors:

Commercial Mortgages may be better if:

• You have substantial liquid capital available
• You prefer to minimize total interest paid
• You can manage higher monthly payments
• You want a simpler, single-loan structure

SBA 504 Loans may be better if:

• You want to preserve working capital
• You need lower monthly payments for cash flow
• You prefer payment predictability with fixed rates
• Your business meets SBA eligibility requirements (net worth under $20 million, net profit under $6.5 million)

Conclusion

Both financing options have distinct advantages, but SBA 504 loans often provide more favorable long-term cost structures for growing small businesses, particularly those prioritizing cash flow and capital preservation.

While commercial mortgages may result in lower total interest paid over shorter terms, SBA 504 loans offer benefits that can outweigh this cost:

• 10% down payment preserves working capital
• Lower monthly payments improve cash flow
• Fixed rates provide long-term cost certainty
• Financeable fees reduce upfront expenses

For many small businesses, these advantages make SBA 504 loans the more accessible and financially manageable option, despite potentially higher total interest costs over the extended loan term.

To explore whether an SBA 504 loan is right for your business, contact our loan officers for a personalized consultation. 

As the Southeast's leading SBA 504 lender, we can help you navigate the application process with certainty, speed, and exceptional service.

FAQs on Commercial Mortgages vs. SBA 504 Loans

What's the biggest advantage of an SBA 504 loan compared to a commercial mortgage?

The biggest advantage is the significantly lower down payment requirement of only 10% with an SBA 504 loan, compared to 20-30% for commercial mortgages. This allows businesses to preserve working capital for operations and growth while still acquiring essential real estate or equipment.

Do SBA 504 loans always cost more in the long run than commercial mortgages?

Not necessarily. While SBA 504 loans often result in higher total interest paid due to longer terms, the combination of lower monthly payments, preserved working capital, and fixed interest rates can provide financial benefits that outweigh the higher total interest cost for many businesses.

Who qualifies for an SBA 504 loan?

SBA 504 loans are designed for for-profit businesses with a tangible net worth under $20 million and average net profit under $6.5 million (after taxes) for the two years prior to application. The property must be at least 51% owner-occupied for real estate purchases.

Can the fees for an SBA 504 loan be financed into the loan amount?

Yes, most SBA 504 loan fees (approximately 2.9% of the SBA portion) can be financed into the loan amount, reducing upfront out-of-pocket expenses. This includes the SBA guarantee fee, CDC processing fee, funding fee, and underwriters' fees.

What loan terms are available for SBA 504 loans versus commercial mortgages?

SBA 504 loans offer terms of 10, 20, or 25 years with no balloon payments, while commercial mortgages typically have terms up to 10 years, often with balloon payments. The longer terms of SBA 504 loans result in lower monthly payments, improving cash flow for businesses.