A commercial mortgage is a loan used to buy, refinance, or improve income-producing or owner-occupied business real estate, secured by the property itself. It works much like a home mortgage, but the underwriting focuses on the property's income and your business's finances rather than your household paycheck, the terms are shorter, and the down payment is larger. Most small business borrowers put down 20% to 35%, finance the balance over a 5 to 25 year term, and close in 30 to 90 days. This page walks through how these loans are structured, what they realistically cost, the qualification standards lenders actually use, and the practical alternatives to reach for when a slow close does not fit your timeline.
Key takeaways
- Commercial mortgages typically require 20% to 35% down, though SBA 504 loans can go as low as 10% for owner-occupied property.
- Terms often amortize over 20 to 25 years but balloon at 5, 7, or 10 years, requiring a refinance or sale at maturity.
- Debt service coverage ratio (DSCR) is the key approval metric; most lenders want at least 1.20 to 1.25.
- Closing costs generally run 2% to 5% of the loan and can include appraisal, environmental, legal, and origination fees.
- Expect a 30 to 90 day close for bank and SBA loans due to appraisals, environmental reports, and legal review.
- When speed matters, revenue-based financing underwrites on bank deposits and revenue (FICO 500+, from ~$10,000) and can fund in 24 to 48 hours.
- Approval is never guaranteed; the right tool depends on the purpose and timeline of the capital you need.
What a Commercial Mortgage Is and How It Differs From a Home Loan
A commercial mortgage funds real estate used for business purposes: an office suite, a retail storefront, a warehouse, a medical or dental practice, a restaurant building, a self-storage facility, a multifamily building with five or more units, or raw land slated for development. The property secures the loan, so if payments stop the lender can foreclose and sell it to recover the balance.
The differences from a residential mortgage are meaningful and they surprise first-time commercial borrowers:
- Shorter terms with balloon payments. Many commercial loans amortize the payment as if it were a 20 or 25 year loan but come due in 5, 7, or 10 years. At that maturity you owe a large lump sum (the balloon) and must refinance or sell.
- Larger down payments. Expect 20% to 35% down. A 3% or 5% down option like FHA does not exist here.
- Income-first underwriting. Lenders care whether the property and your business generate enough cash flow to cover the payment with room to spare, measured by the debt service coverage ratio (DSCR).
- Business and personal review together. On smaller loans you will almost always sign a personal guarantee, and the lender reviews both your business tax returns and your personal ones.
- More third-party costs. Commercial appraisals, environmental reports, and legal review add cost and time that a home purchase never sees.
Types of Commercial Mortgages
Not every commercial mortgage is the same product. The right one depends on whether you occupy the building, whether you need speed or the lowest rate, and how strong your financials are.
- Conventional bank commercial mortgage. Offered by banks and credit unions, typically the lowest rates for well-qualified borrowers with strong financials and a proven track record. Slowest to close and the strictest on documentation.
- SBA 504 loan. Designed for owner-occupied real estate and major fixed assets. Structured as a bank loan for roughly half the project, a Certified Development Company loan for about 40%, and 10% down from the borrower. Long terms (up to 25 years) and competitive fixed rates, but paperwork-heavy.
- SBA 7(a) loan. A flexible general-purpose SBA loan that can include real estate along with working capital or equipment. Up to $5 million, up to 25 years on real estate, with a required personal guarantee.
- CMBS / conduit loans. Larger loans that are pooled and sold to investors as bonds. Common on stabilized income properties above roughly $1 million to $2 million; non-recourse is often available but terms are rigid.
- Bridge loans. Short-term (6 to 36 months), higher-rate financing to buy quickly, reposition, or hold a property until it qualifies for permanent financing. Used when speed matters more than price.
- Hard money / private lender. Asset-based loans that lean on the property's value rather than your financials. Fast and flexible, but the most expensive.
Rates, Terms, and Fees: What You Actually Pay
Commercial mortgage pricing moves with the broader rate environment and with your loan's risk profile, so treat every published number as a range, not a promise. Rates depend on the property type, your credit and financials, the loan-to-value ratio, and whether the rate is fixed or floating. The table below shows illustrative ranges by product type to help you set expectations before you shop.
| Product type | Typical term | Typical down payment | Where rates usually sit |
|---|---|---|---|
| Conventional bank mortgage | 5-10 yr (20-25 yr amortization) | 20-30% | Lowest of the group |
| SBA 504 | 10, 20, or 25 yr | 10% | Competitive fixed |
| SBA 7(a) | Up to 25 yr | 10-15% | Prime-based, variable common |
| CMBS / conduit | 5, 7, or 10 yr | 25-35% | Mid-range, spread over benchmark |
| Bridge loan | 6-36 months | 20-35% | Higher, interest-often-only |
| Hard money | 6-24 months | 25-40% | Highest |
Beyond the rate, budget for closing costs that typically run 2% to 5% of the loan amount. Common line items include:
- Origination or lender fee: often 0.5% to 2% of the loan.
- Commercial appraisal: commonly a few thousand dollars, more for complex properties.
- Environmental report (Phase I): required on many property types, especially former industrial or gas-station sites.
- Legal, title, and recording fees.
- Prepayment penalties: many commercial loans use step-down penalties or yield maintenance, so paying off early can be costly. Always read this clause before signing.
A Real Payment Example (Owner-Occupied Retail Building)
Numbers make this concrete. Suppose you are buying a retail building for your business. The figures below are rounded and labeled for example only; your actual rate, taxes, and insurance will differ.
| Item | Amount (for example) |
|---|---|
| Purchase price | $750,000 |
| Down payment (25%) | $187,500 |
| Loan amount | $562,500 |
| Assumed rate (for example) | 7.5% fixed |
| Amortization | 25 years |
| Balloon / maturity | 10 years |
| Estimated monthly principal & interest | ~$4,160 |
| Estimated closing costs (3%) | ~$16,900 |
| Approximate cash needed at close | ~$204,000 |
Two things stand out. First, the cash to close (down payment plus closing costs) is the real hurdle for most owners, not the monthly payment. Second, because the loan balloons at year 10 while amortizing over 25, you will still owe roughly $460,000 at maturity and will need to refinance or sell then. Planning for that refinance from day one is part of doing this responsibly.
Qualification Reality: What Lenders Actually Check
Marketing pages list ideal borrowers. Here is what underwriting actually weighs, and where deals get declined.
- Debt service coverage ratio (DSCR). This is the single most important metric. Lenders divide the property's or business's net operating income by the annual loan payment and usually want at least 1.20 to 1.25. A 1.25 DSCR means you earn $1.25 for every $1 of debt payment. Fall below 1.20 and most conventional lenders pass.
- Loan-to-value (LTV). Most cap at 75% to 80% of the appraised value, which is why the down payment is large. If the appraisal comes in low, you bring more cash or the deal shrinks.
- Credit. Banks and SBA lenders generally look for personal FICO in the high 600s or better, plus clean business credit.
- Time in business and financials. Two-plus years of operating history and two to three years of business and personal tax returns are standard. Startups struggle to qualify without strong outside income or collateral.
- The property itself. Its condition, location, tenant quality (for investment properties), and any environmental issues can make or break approval regardless of your finances.
- Global cash flow. Lenders increasingly look at all your income and all your debt together, not just the subject property.
The honest takeaway: a commercial mortgage is a strong, low-cost tool when your financials are seasoned, your down payment is ready, and your timeline allows 60 to 90 days. It is a poor fit when you need money in days, have thin or recent financials, or lack the cash for a large down payment.
When a Commercial Mortgage Is the Wrong Tool: Faster Alternatives
Real estate ownership is a long-term play, and a mortgage is the right instrument for it. But many owners reach for property financing when what they actually need is working capital, or when a slow close would cost them a time-sensitive opportunity. In those cases, forcing a commercial mortgage is the wrong move.
If your need is short-term cash flow, covering a seasonal gap, buying inventory at a discount, making payroll during a slow stretch, or bridging until a mortgage closes, a revenue-based financing marketplace is usually the better fit. These programs underwrite differently than a bank:
- Approval leans on bank-deposit history and monthly revenue more than on credit score, so consistent deposits can matter more than a perfect FICO.
- Credit requirements are more forgiving, often starting around a 500 FICO.
- Funding amounts typically start near $10,000 and scale with your revenue.
- Speed is the main advantage: funding often lands within 24 to 48 hours of approval rather than weeks or months.
These products are not a substitute for a mortgage when the goal is to own real estate for the long haul, and approval is never guaranteed. But when timing is the constraint, revenue-based capital can keep a deal or a season alive while a slower, cheaper mortgage works its way through underwriting. A marketplace lets you compare multiple offers against your actual numbers instead of applying to lenders one at a time.
How to Apply and What to Prepare
Whether you pursue a bank mortgage, an SBA loan, or faster revenue-based capital, preparation shortens the process and improves your offers. Assemble this before you apply:
- Business and personal tax returns (two to three years for mortgages).
- Recent business bank statements (three to twelve months; deposit history is central to revenue-based approval).
- Year-to-date profit and loss statement and balance sheet.
- A rent roll and leases if the property produces tenant income.
- The purchase contract or refinance details, plus a simple explanation of how the property fits your business plan.
- A debt schedule listing existing loans, balances, and payments.
Then match the tool to the timeline. If you have 60 to 90 days and strong financials, get quotes from at least two banks and an SBA lender and compare the full cost including fees and prepayment terms. If you need capital in days, or your financials are still maturing, a revenue-based marketplace can return multiple offers quickly with far less paperwork. Read every rate, fee, and prepayment clause before you sign, and choose the financing that fits both the purpose and the timeline of the money you need.
Frequently asked questions
How much down payment do I need for a commercial mortgage?
Most conventional commercial mortgages require 20% to 35% down. SBA 504 loans are a notable exception, often allowing as little as 10% down for owner-occupied property, which is why they are popular with small business buyers who are short on cash to close.
What credit score do commercial mortgage lenders want?
Banks and SBA lenders generally look for personal credit in the high 600s or better, along with clean business credit and solid financials. If your score is lower or your business history is short, a revenue-based financing marketplace may still work because it weighs bank-deposit history and monthly revenue more heavily and often starts around a 500 FICO.
How long does it take to close a commercial mortgage?
Plan for 30 to 90 days. Conventional bank and SBA loans sit at the longer end because of appraisals, environmental reports, and legal review. If you need funding in days rather than months, revenue-based capital can often fund within 24 to 48 hours of approval, though it is a short-term tool, not a substitute for a mortgage.
What is DSCR and why does it matter so much?
DSCR, the debt service coverage ratio, divides the property's or business's net operating income by its annual loan payment. Most lenders want at least 1.20 to 1.25, meaning you earn $1.20 to $1.25 for every $1 of debt payment. It is the metric most likely to make or break a commercial mortgage approval, so it is worth calculating your own before you apply.
What is a balloon payment and should I worry about it?
Many commercial mortgages amortize the monthly payment over 20 or 25 years but come due in 5, 7, or 10 years. At that maturity you owe the remaining balance in one lump sum, the balloon, and must refinance or sell. It is manageable if you plan for it from day one, but it is a real risk if property values or rates move against you at maturity.
Can I get a commercial mortgage for a startup or new business?
It is difficult. Most lenders want two or more years of operating history and tax returns. Startups typically need strong outside income, substantial collateral, or an SBA loan with a solid business plan and personal guarantee. If the real need is working capital rather than owning property, revenue-based financing tied to your deposits is often a more realistic starting point.
Is a commercial mortgage or a revenue-based advance better for my business?
They solve different problems. A commercial mortgage is the right, low-cost tool for owning real estate over the long term when your financials are seasoned and your timeline allows a slow close. Revenue-based financing is better for short-term working capital or time-sensitive opportunities where speed matters. Neither is guaranteed, and the best choice depends on the purpose and timeline of the money you need.
What are typical closing costs on a commercial mortgage?
Budget 2% to 5% of the loan amount. That commonly includes an origination fee of roughly 0.5% to 2%, a commercial appraisal, an environmental report on many property types, and legal, title, and recording fees. Watch for prepayment penalties such as step-down or yield maintenance, which can add significant cost if you pay the loan off early.
