SBA Loan vs Conventional for Commercial Real Estate

What is the difference between an SBA loan and a conventional commercial loan?

If you are financing commercial real estate, one of the first decisions you will face is whether to pursue an SBA loan or conventional financing. Both options can fund your purchase, but they differ in fundamental ways that affect your costs, timeline, flexibility, and long-term obligations.

An SBA loan is a government-backed financing program administered by the U.S. Small Business Administration. The SBA does not lend money directly. Instead, it guarantees a portion of the loan made by an approved lender, reducing the lender's risk and allowing more favorable terms for borrowers. The two primary SBA programs for commercial real estate are the SBA 504 loan and the SBA 7(a) loan.

A conventional commercial loan comes directly from a bank, credit union, or private lender with no government backing. The lender assumes the full risk of the loan, which is why conventional loans typically require stronger borrower financials, higher down payments, and shorter repayment terms.

The government guarantee behind SBA loans is what drives most of the practical differences. Because the SBA absorbs a significant portion of the default risk, lenders can offer lower down payments (as low as 10%), longer repayment terms (up to 25 years), and, in the case of the 504 program, below-market fixed interest rates.

Conventional commercial loans, on the other hand, offer speed, flexibility, and fewer restrictions. There are no owner-occupancy requirements, no government-imposed loan caps, and no restrictions on property use. If you need to close quickly or are purchasing a pure investment property, conventional financing is often the only viable path.

Explore SBA loan options through Clearhouse Lending, or review our conventional commercial loan programs to see which structure fits your deal.

Is it easier to qualify for an SBA loan or a conventional loan?

Qualification requirements differ between SBA and conventional loans, and which is "easier" depends entirely on your financial profile and the property you are purchasing.

SBA loan qualification requirements

SBA loans are designed to help small business owners access financing they might not otherwise qualify for. The government guarantee gives lenders more confidence, which translates to more flexible qualification standards in some areas:

• Credit score: Most SBA lenders require a minimum FICO of 680, though some programs accept scores as low as 650 with compensating factors.
• Business history: The SBA strongly prefers businesses with at least 2 years of operating history. Startups can qualify but face additional scrutiny and higher down payment requirements.
• Cash flow: SBA lenders evaluate your global cash flow, meaning they look at income from all sources (the business, personal income, other businesses) to determine your ability to service the debt.
• Owner occupancy: Your business must occupy at least 51% of the property. This is a firm SBA requirement, not a lender preference.
• Business size: You must meet the SBA's size standards for your industry, generally meaning annual revenue under $8-41.5 million depending on your NAICS code.

Conventional loan qualification requirements

Conventional commercial lenders focus primarily on the strength of the property and the borrower's financial track record:

• Credit score: Most conventional CRE lenders require a minimum FICO of 700, with 720+ preferred for the best terms.
• DSCR (Debt Service Coverage Ratio): The property must generate enough income to cover debt payments, typically requiring a DSCR of 1.25 or higher. Lenders place heavy emphasis on this metric.
• Down payment: Expect to put down 20-30% of the purchase price, compared to 10-20% for SBA.
• Net worth and liquidity: Conventional lenders often require borrowers to have a net worth equal to the loan amount and 6-12 months of debt service in liquid reserves.
• No occupancy requirement: You can finance owner-occupied or investment properties.

The bottom line: SBA loans are generally easier to qualify for if you are a small business owner who plans to occupy the property but may have limited capital for a down payment. Conventional loans are easier if you have strong financials and want to avoid the SBA's occupancy and use restrictions.

Not sure which loan you qualify for? Contact Clearhouse Lending for a free pre-qualification assessment on both SBA and conventional options.

What are the disadvantages of SBA loans for commercial real estate?

While SBA loans offer attractive terms, they come with significant drawbacks that every borrower should understand before committing to the process.

Slow closing timelines

SBA loans are notoriously slow. The 504 program involves three parties (the borrower, the bank, and a Certified Development Company), each with its own underwriting process. From application to closing, expect 60 to 90 days at minimum. By comparison, a conventional commercial loan can close in 30 to 45 days. In competitive markets, this timeline disadvantage can cost you deals.

Owner-occupancy requirements

The SBA requires that your business occupy at least 51% of the property for existing buildings and 60% for new construction. This eliminates SBA financing for pure investment properties and limits your ability to lease out significant portions of the building to other tenants.

Guarantee fees add to your costs

SBA loans carry guarantee fees that conventional loans do not. For 7(a) loans, the upfront guarantee fee ranges from 0.25% to 3.75% of the guaranteed portion depending on loan size. The 504 program charges fees to the CDC, SBA, and central servicing agent that get passed through to the borrower.

Prepayment penalties

SBA 504 loans carry a declining prepayment penalty over the first 10 years of the loan. If you sell the property or refinance early, you will owe a penalty that starts at approximately 5% and declines each year. SBA 7(a) loans only carry prepayment penalties on loans with terms of 15 years or longer, with penalties applying during the first 3 years.

Extensive paperwork

SBA applications require significantly more documentation than conventional loans, including detailed business plans, financial projections, personal financial statements, tax returns, and SBA-specific forms.

Loan size limitations

SBA 7(a) loans cap at $5 million, and SBA 504 loans cap at $5.5 million for standard projects (up to $16.5 million for certain energy-related projects). If you are acquiring a larger property, SBA financing will not cover the full purchase.

For a deeper look at the SBA 504 and 7(a) differences, read our detailed comparison of SBA 504 vs 7(a) loans.

When should you choose a conventional loan over SBA?

Conventional commercial loans are the better choice in several specific scenarios. Understanding when to go conventional can save you time, money, and frustration.

You need to close quickly

If the seller has a tight timeline or you are competing against other offers, conventional financing gives you a significant speed advantage. A 30 to 45 day closing timeline versus 60 to 90 days for SBA can make or break a deal.

You are buying an investment property

This is the most clear-cut scenario. If you are purchasing commercial real estate purely as an investment and will not occupy at least 51% of the property, SBA financing is not an option. Conventional loans, DSCR loans, or bridge loans are your primary alternatives.

The property exceeds SBA loan limits

For acquisitions above $5 million (7a) or $5.5 million (504), you will need conventional or other private financing. Many commercial properties in major metro areas exceed these thresholds, making conventional loans the default choice for larger deals.

You have strong financials and want simplicity

If you have a high credit score (720+), strong cash flow, substantial net worth, and 20-30% available for a down payment, conventional financing offers a streamlined process without the SBA's additional paperwork, fees, and restrictions.

You want flexibility on property use

Conventional loans do not restrict how you use the property. You can lease the entire building to tenants, use it as a mixed-use property, or change your occupancy plan over time without violating loan covenants.

Explore our full range of commercial acquisition loan programs to see which conventional options fit your deal.

Can you use an SBA loan for commercial real estate investment?

This is one of the most commonly misunderstood aspects of SBA financing. The short answer is: not for pure investment properties.

The SBA requires that borrowers use the financed property primarily for their own business operations. Specifically, your business must occupy at least 51% of an existing building or 60% of a newly constructed building. This owner-occupancy requirement is a core SBA rule and is not negotiable.

Here is what qualifies and what does not:

Eligible for SBA financing:

• Buying an office building where your company occupies 51%+ and you lease the remaining space to other tenants
• Purchasing a retail space for your business with a small portion leased to a complementary business
• Acquiring a mixed-use property where your business operates from the majority of the space
• Building a new facility specifically for your business operations

Not eligible for SBA financing:

• Buying a commercial property solely to lease to tenants
• Purchasing an apartment building or multifamily property as an investment
• Acquiring a shopping center where you do not operate a business
• Buying commercial land for speculation

For investors who want to finance commercial property without occupancy restrictions, conventional financing is the standard path. Use our commercial mortgage calculator to estimate payments on a conventional investment property loan.

Looking for investment property financing without SBA restrictions? Talk to our commercial lending team about conventional and portfolio loan options for your deal.

How do SBA 504 and 7(a) loans compare to conventional financing?

Understanding the differences between the two main SBA programs and conventional financing helps you identify the best structure for your specific deal.

SBA 504 loans

The 504 program is specifically designed for major fixed-asset purchases, including commercial real estate and heavy equipment. It uses a unique three-party structure:

• A conventional lender provides 50% of the project cost as a first-position mortgage
• A Certified Development Company (CDC) provides up to 40% as a second-position loan funded by an SBA-guaranteed debenture
• The borrower contributes at least 10% as a down payment

The CDC portion carries a fixed interest rate tied to the current Treasury rate, which as of February 2026 sits at approximately 5.81% for 25-year debentures and 5.87% for 20-year debentures, according to Pursuit Lending's rate data. This below-market fixed rate on 40% of the deal is the 504 program's biggest advantage.

SBA 7(a) loans

The 7(a) program is the SBA's most versatile loan program. Unlike the 504, the entire loan comes from a single lender with the SBA guaranteeing 75-85% of the loan amount.

• Maximum loan amount: $5 million
• Interest rates: Variable, tied to Prime rate. For loans over $250,000, the maximum rate is Prime + 3%, which equals 9.75% as of February 2026, based on the current Prime rate of 6.75%
• Terms: Up to 25 years for commercial real estate
• Starting March 2026, the SBA is introducing alternative base rate options including SOFR and Treasury rates, which may provide more competitive variable rate structures, according to the Federal Register

Conventional commercial loans

Conventional commercial mortgages typically feature:

• Interest rates ranging from 6.50% to 8.75% as of February 2026, depending on property type, borrower strength, and loan structure, per Commercial Loan Direct
• Terms of 5 to 10 years with a 20 to 25 year amortization (meaning a balloon payment at maturity)
• No loan amount cap, though individual lenders have their own limits
• No government guarantee, fees, or occupancy requirements

The rate comparison reveals an important nuance. While SBA 504 loans offer the lowest fixed rates in the market, SBA 7(a) variable rates are actually higher than most conventional fixed rates. Borrowers who assume "SBA loan" automatically means "lower rate" may be surprised to find that a 7(a) loan at 9.75% costs significantly more per month than a conventional loan at 7.00%.

What are the down payment differences between SBA and conventional?

Down payment requirements are one of the most impactful differences between SBA and conventional financing, especially for small business owners with limited capital.

SBA 504 down payment

The standard SBA 504 down payment is 10% of the total project cost. However, this increases in certain situations:

• 15% down payment: Required if the property is a special-purpose building (a building that can only be used for one specific purpose, like a car wash or gas station) OR if the business has been operating for less than 2 years
• 20% down payment: Required if both conditions apply (special-purpose property AND business under 2 years old)

For a $1 million commercial property, a standard 504 borrower would need just $100,000 down, compared to $200,000 to $300,000 for a conventional loan. That $100,000 to $200,000 difference can be redirected toward renovations, equipment, working capital, or cash reserves.

SBA 7(a) down payment

SBA 7(a) down payment requirements are 10-20%, depending on the lender and the deal. The SBA requires at least 10% equity injection for business acquisitions and startups. For established businesses purchasing real estate, the down payment is negotiated between the borrower and lender, but 10-15% is standard.

Conventional commercial down payment

Conventional lenders typically require 20-30% down for commercial real estate. The exact amount depends on:

• Property type (owner-occupied vs. investment)
• Borrower's credit and financial strength
• Property condition and location
• Loan-to-value ratio the lender is comfortable with

The down payment advantage of SBA loans is substantial, and it is the primary reason many small business owners choose SBA financing despite the longer timelines and additional paperwork.

How does the SBA 504 loan process work compared to conventional?

The SBA 504 loan process is more complex than conventional financing because it involves multiple parties and two separate underwriting tracks.

Conventional commercial loans follow a more straightforward path: you apply to a single lender, they underwrite the deal, and you close. The SBA 504 process requires coordination between your bank, the CDC, and the SBA itself, with each party having its own documentation requirements and approval processes.

Conventional commercial loan process:

1. Application: Submit financial documents and property information to lender
2. Underwriting: Lender reviews borrower financials and orders property appraisal (2-3 weeks)
3. Approval: Loan committee reviews and approves the deal
4. Closing: Final documents executed, funds disbursed (total: 30-45 days)

For borrowers who need speed, the conventional process is clearly superior. For borrowers who need the lowest possible down payment and longest fixed-rate terms, the SBA 504's complexity is worth the wait.

What are the most common questions about SBA vs conventional commercial loans?

What is the maximum SBA loan amount for commercial real estate?

SBA 7(a) loans cap at $5 million. SBA 504 loans cap at $5.5 million for standard projects and up to $16.5 million for projects meeting certain public policy goals, including energy efficiency and manufacturing. If your deal exceeds these limits, conventional financing or a combination of loan products is necessary.

Can I get an SBA loan for a mixed-use property?

Yes, as long as your business occupies at least 51% of the total usable square footage. The remaining space can be leased to other tenants. Many SBA borrowers purchase mixed-use buildings where they operate from the main floor and lease upper floors or secondary spaces to other businesses.

Do SBA loans require a personal guarantee?

Yes. The SBA requires a personal guarantee from anyone who owns 20% or more of the business. Conventional loans also typically require personal guarantees, but some conventional lenders will negotiate limited or partial guarantees for strong borrowers with substantial collateral.

How long does SBA loan approval take compared to conventional?

SBA 7(a) loans typically take 45 to 90 days from application to closing. SBA 504 loans take 60 to 90 days or longer due to the dual underwriting process. Conventional commercial loans typically close in 30 to 45 days. The SBA recently introduced streamlined processes for smaller loans, but larger deals still require significant processing time.

Can I switch from SBA to conventional financing later?

Yes. You can refinance an SBA loan into a conventional loan at any time, though SBA 504 loans carry prepayment penalties during the first 10 years that should be factored into your decision. Many borrowers start with SBA financing for the lower down payment, build equity over time, and then refinance into a conventional loan for more flexibility.

What are the current SBA guarantee fees?

For SBA 7(a) loans, the upfront guarantee fee ranges from 0% for loans of $150,000 or less (under the current fee reduction) to 3.75% of the guaranteed portion for loans over $1 million. The SBA 504 program charges a CDC processing fee, an SBA guarantee fee, and a funding fee that collectively add approximately 2.15-2.65% to the project cost. As of 2026, the SBA reinstituted a 50 basis point upfront guaranty fee for non-manufacturing 504 projects.

Is there a minimum revenue requirement for SBA loans?

The SBA does not set a specific minimum revenue threshold. However, your business must demonstrate the ability to repay the loan from its operating cash flow. Lenders evaluate your debt service coverage ratio, working capital, and profitability trends. Startups without revenue history face additional scrutiny and typically need stronger business plans and industry experience.

Ready to determine the right financing structure for your commercial real estate purchase? Schedule a consultation with Clearhouse Lending for a side-by-side comparison of SBA and conventional options tailored to your specific deal.

Sources: SBA.gov 7(a) Loan Program, SBA.gov 504 Loan Program, Pursuit Lending SBA 504 Rates, Lendio SBA Interest Rates, Commercial Loan Direct Rates, Federal Register: 7(a) Alternative Base Rates