Minimum commercial real estate loan down payment

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Page written by Ashlyn Brooks. Last reviewed on August 29, 2024. Next review due October 1, 2025.

The real estate market as a whole goes through ebbs and flows depending on the time of year, economic health, and political influences. To add to the chaos, residential real estate and commercial real estate operate in their own silos, having different requirements, expectations, and boundaries you need to know about.

Here at Swoop, we pride ourselves in helping SMBs realize their business dreams through proper funding and understanding the options available. Let’s sift through the details of commercial real estate to get a better understanding of what to expect when you’re planning for down payment costs.

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Is a commercial real estate down payment required?

Yes, a down payment is typically required for commercial real estate loans. Unlike some residential mortgages that might offer zero down payment options, commercial loans usually demand a significant upfront payment. This requirement serves multiple purposes:

Risk mitigation: Lenders use the down payment to reduce their risk.
Borrower commitment: It demonstrates the borrower’s financial commitment and investment in the property.
Equity building: It helps build equity in the property from the outset.

How much do I need to make for commercial real estate?

Aim to have 10% and 30% of the property’s purchase price ready to put down at closing. The exact percentage can vary significantly based on several factors.

For example, the type of property plays a big part; office buildings, retail spaces, and industrial properties often have different down payment requirements. Plus, the type of loan you choose, such as a conventional loan, SBA loan, or bridge loan, each comes with its own down payment criteria.

Lender policies also influence down payment amounts. Different lenders may have varying requirements based on their risk tolerance and lending criteria. For instance, if you’re purchasing a $1,000,000 retail space, you might need to prepare a down payment of $100,000 to $300,000, depending on these factors. A conventional loan might require a 25% down payment, translating to $250,000, while an SBA 7(a) loan could require just 10%, or $100,000.

See our Commercial real estate calculator to work through some numbers of your own.

How is a down payment determined?

A down payment is determined based on a combination of factors, including the loan type, property type, and borrower’s financial profile. Here’s how these elements come into play:

What factors will affect the down payment requirements?

Property type and condition: Similarly to a new home versus an existing home, a newly built office space may require a different down payment compared to an older retail space needing renovations.
Location: Prime locations might demand higher down payments due to their value and demand. This includes factors such as foot traffic, cost of living, and proximity to other hubs, like airports or major cities.
Loan type and terms: The specifics of your loan, including its terms and interest rate, will influence the down payment amount.
Borrower’s financial health: Arguably, one of the most influential factors is a strong credit score and financial stability. If you have a stellar credit history, it can lower the required down payment.
Lender’s risk assessment: Lenders evaluate the potential risk involved in the loan, adjusting down payment requirements accordingly. For instance, if your property plans to handle highly combustible products, your ‘risk’ may be assessed higher.

How does the loan type affect the down payment amount for a commercial property?

Different types of loans have distinct down payment requirements:

Conventional loans: Typically require 20% to 30% down.
SBA 7(a) loans: Often require about 10% down, making them attractive for small businesses.
SBA 504 loans: May require around 10% to 20% down.
Bridge loans: Usually demand 20% to 30% down, depending on the lender and loan terms.

Conventional loans

Conventional loans typically require a down payment of 20% to 30%. These are traditional loans offered by banks and financial institutions without government backing. They are well-suited for businesses with a solid credit history and stable financials, often resulting in lower interest rates and flexible terms.

Established businesses looking to invest in long-term property ownership find conventional loans beneficial. They are ideal for purchasing prime commercial properties where the borrower can afford a higher down payment. Conventional loans are also preferred by businesses that do not rely on government programs.

SBA 7(a) loans

SBA 7(a) loans often require about 10% down, making them attractive for small businesses. These loans are partially guaranteed by the Small Business Administration (SBA) and can be used for purchasing real estate, equipment, and working capital. They are particularly beneficial for small businesses that may not qualify for conventional loans due to limited credit history or lower credit scores.

Businesses looking to minimize their initial outlay can take advantage of the lower down payment requirements. SBA 7(a) loans are ideal for businesses planning to expand operations or purchase their first commercial property. The favorable terms and support from the SBA make these loans a popular choice.

SBA 504 loans

SBA 504 loans typically require a down payment of 10% to 20%. These loans are designed to help small businesses purchase fixed assets like real estate and equipment. SBA 504 loans involve a partnership between a Certified Development Company (CDC), the borrower, and a conventional lender.

They are suitable for companies looking for long-term financing with fixed interest rates. Businesses focused on acquiring large fixed assets often prefer SBA 504 loans. They are also advantageous for businesses that plan to create jobs, aligning with the SBA’s mission to support economic development.

Bridge loans

Bridge loans usually demand a down payment of 20% to 30%, depending on the lender and loan terms. These are short-term loans intended to bridge the gap between the purchase of a new property and the sale of an existing one or securing long-term financing. Bridge loans are typically used to finance immediate opportunities and are usually provided by private lenders or financial institutions.

They are suitable for businesses needing quick access to capital to seize time-sensitive opportunities. Companies in a transitional phase, such as relocating or expanding, often find bridge loans beneficial. They are ideal for scenarios where short-term financing is necessary until more permanent financing can be arranged.

How does my credit score affect my down payment amount?

Your credit score is arguably one of the biggest factors in determining the down payment:

High credit score: Indicates lower risk, potentially reducing the down payment requirement.
Low credit score: Higher perceived risk, likely increasing the down payment needed.
Credit history: A solid credit history can also influence lender decisions, sometimes allowing for more favorable down payment terms.

That being said, if you have less than perfect credit, don’t be discouraged, lenders have different criteria and restrictions for all types of credit and loans.

What is the typical range for a down payment on a commercial property loan?

Generally, you can expect to pay between 10% and 30% of the property’s purchase price. However, this range can vary based on several factors discussed earlier. For example:

SBA loans: May require as little as 10% down.
Conventional loans: Typically require 20% to 30% down.
Specialty properties: Certain types of properties might have specific requirements based on their use and value.

Loan Type	Credit Score	Commercial property type	Typical down payment range
Conventional Loan	High (700+)	Office Building	20% - 25%
Conventional Loan	High (700+)	Retail Space	20% - 25%
Conventional Loan	High (700+)	Industrial Property	20% - 25%
Conventional Loan	Low (<700)	Office Building	25% - 30%
Conventional Loan	Low (<700)	Retail Space	25% - 30%
Conventional Loan	Low (<700)	Industrial Property	25% - 30%
SBA 7(a) Loan	High (700+)	Office Building	10% - 15%
SBA 7(a) Loan	High (700+)	Retail Space	10% - 15%
SBA 7(a) Loan	High (700+)	Industrial Property	10% - 15%
SBA 7(a) Loan	Low (<700)	Office Building	15% - 20%
SBA 7(a) Loan	Low (<700)	Retail Space	15% - 20%
SBA 7(a) Loan	Low (<700)	Industrial Property	15% - 20%
SBA 504 Loan	High (700+)	Office Building	10% - 20%
SBA 504 Loan	High (700+)	Retail Space	10% - 20%
SBA 504 Loan	High (700+)	Industrial Property	10% - 20%
SBA 504 Loan	Low (<700)	Office Building	20% - 25%
SBA 504 Loan	Low (<700)	Retail Space	20% - 25%
SBA 504 Loan	Low (<700)	Industrial Property	20% - 25%
Bridge Loan	High (700+)	Office Building	20% - 25%
Bridge Loan	High (700+)	Retail Space	20% - 25%
Bridge Loan	High (700+)	Industrial Property	20% - 25%
Bridge Loan	Low (<700)	Office Building	25% - 30%
Bridge Loan	Low (<700)	Retail Space	25% - 30%
Bridge Loan	Low (<700)	Industrial Property	25% - 30%

How can I lower my down payment?

Lowering your down payment is possible through various strategies:

Improving credit score: A better credit score can lead to more favorable loan terms.
Seeking SBA loans: SBA loans often have lower down payment requirements.
Negotiating with lenders: Sometimes, terms can be negotiated based on your financial profile and the property’s value.
Using collateral: Offering additional collateral can reduce the down payment amount.

What are the advantages of paying a higher down payment?

Paying a higher down payment can offer several benefits:

Lower monthly payments: Reduces the loan amount, leading to lower monthly payments.
Better loan terms: Can result in more favorable interest rates and loan conditions.
Increased equity: Builds equity in the property faster.
Reduced risk: Lowers the lender’s risk, which can lead to better terms and easier approval.

How to get funding for a down payment?

Securing funding for a down payment can be challenging, but several options are available:

Personal savings: Utilizing personal savings or investment accounts.
Equity loans: Borrowing against the equity in other properties.
Business funds: Using retained earnings or business savings.
Investors: Bringing in investors or partners to share the down payment burden.

Can I get a commercial real estate loan without a down payment?

While rare, securing a commercial real estate loan without a down payment is possible. This typically requires:

Strong financials: Exceptional credit and financial stability.
High-value collateral: Offering other high-value assets as collateral.
Special programs: Leveraging special financing programs or grants aimed at economic development.

Get started with Swoop

Here at Swoop, we understand that navigating the complexities of securing a commercial real estate loan can be daunting. Different lenders have varying requirements based on their risk tolerance and lending criteria, which can significantly impact your down payment amount.

For instance, if you’re purchasing a $1,000,000 retail space, you might need to prepare a down payment of $100,000 to $300,000, depending on these factors. A conventional loan might require a 25% down payment, translating to $250,000, while an SBA 7(a) loan could require just 10%, or $100,000.

Our goal is to help you sift through these details, ensuring you have a clear understanding of what to expect and how to best prepare for your commercial real estate investment. Book a call with us today to explore all of the funding options available for your commercial real estate loan.

Written by

Ashlyn Brooks

Ashlyn is a personal finance writer with experience in business and consumer taxes, retirement, and financial services to name a few. She has been published in USA Today, Kiplinger and Investopedia.

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