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Commercial real estate financing

SBA 504 vs commercial mortgage: which is right for your business?

Both finance commercial real estate — but for different buyers, different property types, and different goals. SBA 504 offers a lower down payment and fixed rate for owner-occupied property. A conventional commercial mortgage moves faster and works for investment property too. Here is how to decide.

  • SBA 504: as low as 10% down, fixed below-market rates, owner-occupied only.
  • Commercial mortgage: 20–35% down, any property type, simpler process.
  • PMF LA helps Los Angeles owners and investors compare both before they commit.

CRE financing in Los Angeles

Commercial real estate transactions involve more documentation and moving parts than most business loans. PMF LA helps Los Angeles owners understand what structure fits their property and business profile before the process starts.

10%SBA 504 min. down
25yrSBA 504 max term
FixedSBA 504 rate
BothOptions compared

SBA 504 vs commercial mortgage: side by side

The two main paths to owning commercial property — compared across every factor that affects the decision.

Factor SBA 504 Loan Conventional Commercial Mortgage
Property type Owner-occupied only — business must use 51%+ Owner-occupied or investment/rental property
Down payment 10% established / 15% new business / 15–20% special use Typically 20–35%
Loan amount Up to $5.5M (higher with energy efficiency or manufacturing projects) $250K to $10M+ depending on lender
Rate structure Fixed below-market rate on SBA portion (40%); market rate on lender portion (50%) Fixed or variable — market-rate
Term 10 or 20 or 25 years on SBA portion 5–30 years depending on lender and structure
Process complexity More complex — CDC + SBA-approved lender + SBA all involved More direct — lender to borrower
Time to close 4–8 weeks typical 3–6 weeks typical
Prepayment Prepayment penalty applies (declines over 10 years) Varies by lender — some have penalties, some do not
Best for Owner who wants lowest down payment and fixed rate on long-term hold Investor, faster close, or when simplicity is priority

How SBA 504 financing works

SBA 504 is a three-party structure — different from a conventional commercial mortgage. Understanding how it works helps you decide if the tradeoffs are worth it.

1
SBA-approved lender covers 50%

A bank or non-bank SBA-approved lender provides 50% of the project cost as a conventional first mortgage. This portion carries a market rate.

2
CDC covers 40% with a fixed SBA-backed debenture

A Certified Development Company (CDC) provides 40% of the project cost, backed by an SBA debenture. This is the portion with the fixed below-market rate and long term.

3
Business owner covers 10%

The business owner provides the remaining 10% as a down payment. For new businesses or special-use properties, this may be 15–20%.

4
Both loans close simultaneously

The lender loan and the CDC/SBA debenture close at the same time. The business ends up with two loans — one to the lender, one to the CDC — for the same property.

When each structure makes sense

SBA 504 is the right fit

Owner-occupied, long-term hold

You own a business that will occupy most of the building. You want to stop paying rent and build equity. You have time for the process and want the fixed rate and low down payment that SBA 504 offers.

→ SBA 504 loan

Conventional mortgage fits

Investment or mixed-use property

You are buying a property as an investment — tenants will occupy it, not your business. Or the property is mixed-use and you need investor financing. SBA 504 is not available for this scenario.

→ Commercial mortgage

Speed matters

Faster close is priority

You have a competitive situation or a time-sensitive close. The SBA 504 three-party structure takes longer. A conventional commercial mortgage can often close in 3–4 weeks when the borrower profile is clean.

→ Commercial mortgage

SBA 504 eligibility requirements

Not every business qualifies for SBA 504. Here are the key eligibility factors before starting the process.

  • For-profit business operating in the United States
  • Business net worth must be under $20 million
  • Average net income (after taxes) must be under $6.5 million for the past 2 years
  • Business must occupy at least 51% of the property (existing building) or 60% for new construction
  • Project must create or retain one job per $75,000 in SBA debenture (manufacturing: $120,000)
  • Passive investment companies, nonprofit organizations, and some financial businesses are not eligible
  • Personal guarantee from owners with 20%+ ownership interest required

Eligibility criteria are set by the SBA and subject to change. PMF LA has a direct partnership with Newtek, a nationally recognized SBA preferred lender, and works with a network of SBA lenders and banks. PMF LA helps you evaluate your profile against these requirements before beginning the process.

Common questions about SBA 504 and commercial mortgages

What is the difference between an SBA 504 loan and a commercial mortgage?
An SBA 504 loan is a government-backed program for owner-occupied commercial real estate, with down payments as low as 10% and fixed below-market rates on the SBA portion. A conventional commercial mortgage is a direct lender-to-borrower loan that works for owner-occupied and investment property, typically requiring 20–35% down. The SBA 504 wins on down payment and rate for eligible owner-occupied buyers; the conventional mortgage wins on simplicity and property flexibility.
Can I use an SBA 504 loan for investment property?
No. SBA 504 requires the business to occupy at least 51% of the property. For investment or rental properties, a conventional commercial mortgage or investment property financing is the right path. PMF LA helps Los Angeles business owners and investors compare the right structure for their specific property and goals.
What is the down payment for an SBA 504 loan?
SBA 504 typically requires 10% down for established businesses, 15% for new businesses (less than 2 years), and 15–20% for special-use properties. This is structured as 50% from an SBA-approved lender, 40% from a CDC backed by the SBA, and 10% from the business owner.
Is the SBA 504 rate fixed or variable?
The SBA debenture portion (40% of the project) carries a fixed below-market rate for the life of the loan. The lender portion (50% of the project) carries a market rate that may be fixed or variable depending on the lender. The overall blended rate is often lower than a conventional commercial mortgage.
How does PMF LA help with commercial real estate financing in Los Angeles?
PMF LA helps Los Angeles business owners and investors compare SBA 504 loans, conventional commercial mortgages, and other CRE financing options. The first step is a conversation about the property, the business profile, and the timeline — so you understand what structure fits before beginning the process.

Comparing CRE financing options in Los Angeles?

PMF LA helps business owners and investors compare SBA 504 loans and commercial mortgages before committing to a path. Based in Los Angeles at 10100 Santa Monica Blvd. Serving businesses across the U.S. and Canada.