How to Get Commercial Real Estate Loans with Low Down Payments

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Many small business owners think financing a commercial real estate purchase isn’t an option because the down payment estimates they’ve seen are very high. However, there are options for business owners who cannot afford to put down a 40 percent payment up front. Let’s take a look at your options for taking out a commercial real estate loan with a low down payment and how the Small Business Administration’s (SBA) 504 loan can help you reach your goals.

Getting a Loan from a Conventional Bank or Private Lender

A commercial real estate loan from a conventional bank, whether it is a community or commercial bank, typically comes with high down payments. Banks are likely to require at least 25% of the total project amount upfront, sometimes up to 40%. Those are not low down payments. These types of loans are hard to get as well—they have a rejection rate of up to 80%.

There are also many non-bank private lenders that a business owner can obtain financing from. They are often called finance companies and can have narrow specializations, such as home or commercial property loans. These companies may look like they offer better loans than banks because their down payment requirements are lower, but they can also charge significantly higher interest rates. Additionally, loans from these companies often have short terms, because they are intended to be refinanced quickly.

There are other options, however. The Small Business Administration (SBA) offers both 504 and 7(a) loans to small business owners. These programs include low down payments, below-market interest rates, and longer, more manageable terms. This makes them the perfect options when choosing financing for your commercial real estate purchase.

SBA Loan Programs Offer Low Down Payments

Both the 7(a) and the 504 loans can be used to purchase commercial real estate, but they differ in many of their details. The SBA 7(a) loan is designed to provide working capital. It is guaranteed by the SBA but issued entirely by a bank. While the 7(a) loan has a negotiable down payment, it usually starts at 15%, and the maximum loan size is $5 million. The 7(a) loan requires personal assets to be used along with your commercial property as collateral.

The 504 loan can be used for the purchase or upgrade of fixed assets, that is, land, buildings and long-term equipment. In other words, the 504 loan is specifically intended to be a commercial real estate loan.

The 504 loan has three parts:

  • The first is a loan from a conventional lender for 50% of the total amount. You and that lender determine the amount and conditions of that loan, which becomes your first mortgage.
  • Your Certified Development Company (CDC) facilitates a separate SBA loan of 40% of the total, up to $5 million, at a fixed, below-market interest rate. You can receive up to $5.5 million for manufacturing projects or projects eligible for the SBA’s Green Energy Program. This will be your second mortgage.
  • Then you, the borrower, will contribute just 10%. Certain types of facilities are classified as single-purpose properties by the SBA and require a 15% down payment.
  • 50% Conventional lender
  • 40% CDC
  • 10% Borrower

When you buy a building, the 504 loan does not require any additional collateral, just the assets acquired. The fees for the SBA portion of the 504 loan can be rolled over into the loan amount as well, so your out-of-pocket expenditures are uniquely low.

504 Loans Are Attractive To Conventional Lenders

SBA 504 loans offer banks a good deal, as well. Your 504 loan is a low risk for the conventional bank because they hold the first mortgage. They have a lien on the whole property, even though they are only financing a portion of it. It is an easy way for the bank to attract new business and to enlarge their impact in the community. This means that you are more likely to get financing from a conventional bank when you are backed by the SBA with a 504 loan. The bank may even give you better conditions than they would offer otherwise.

You can find a few loan options with low down payments. The 504 loan stands apart because it offers a low down payment and an advantageous overall loan package with fixed, below-market interest rates. You can find out more about the 504 loan program from your local CDC.

TMC Financing is one of the nation’s top-ranking CDCs and a Premier Certified Lender with the SBA. If your business is located in California or Nevada and you are thinking about buying your own property, talk to one of our local 504 loan experts. TMC’s loan experts are happy to provide guidance through the whole 504 loan process.

Barbara Morrison, a local small business advocate and civic leader, founded her first company TMC Financing in 1981. TMC is a Certified Development Company that provides commercial real estate financing to small business owners via the SBA 504 Loan Program. TMC consistently ranks among the top certified development companies nationwide, and has funded projects worth more than $9 billion across California and Nevada. Nearly 5,000 small businesses have benefitted from this financing, resulting in the creation of an estimated 50,000 jobs. TMC is also the No.1 SBA 504 hotel lender in the United States. Barbara is also the founder of Working Solutions, a Bay Area microlender whose mission is to provide micro entrepreneurs, particularly low-income individuals, women and minorities, with the access to capital and resources they need to start a successful business.
Barbara Morrison