Commercial real estate loans (CRE) are often used to finance income-producing commercial properties like office space, hotels, or apartment complexes. Unlike residential mortgages, these loans are meant for small business owners, developers, corporations, and other business entities rather than individuals intending to live on the property. There are several types of commercial loans, such as conventional commercial real estate loans, SBA 7(a) loans, and hard-money loans. Each serves its own purpose and has its own requirements. If you’re looking to grow a business, here’s how to get a commercial loan, as well as which type might be best for you.Best Real Estate Loans
What is a commercial real estate loan?
A commercial real estate loan, or business mortgage loan, is a mortgage secured through a lien on a business property. They’re typically offered through private lenders, major banks, or investors. Business entities who need outside financing to run or expand their business may use these loans to buy income-producing properties. These entities include:
- Limited liability companies
Borrowers can use the funds for a variety of commercial purposes, such as to buy hotels, restaurants, warehouses, shopping centers, offices, or apartment complexes. They can also grow or expand on an existing business and increase revenues.
These business mortgage loans operate similarly to residential mortgages, meaning they come with their own terms, requirements, and interest rates. Since they come with a lien, the lender has the right to repossess and sell the property if the borrower fails to make payments as agreed. In other words, the commercial property is an investment that can earn income, but also serves as collateral in case the business fails.
In brief, here’s the CRE loan or business mortgage definition:
- A loan used to buy property or land for business or commercial reasons
CRE Loan Types
There are several types of mortgage for a business property. Each loan has its intended purpose, loan amount, interest rates, and term lengths. Here are the most common options for business owners:
- Conventional Commercial Real Estate Loan: CRE loans use a lien to secure income-producing properties such as apartments, offices, self-storage facilities, hotels, and churches. They don’t have a borrowing maximum, but typical loan term are 5, 7, or 10 years. These loans have a longer amortization period of 20 to 30 years. Interest rates are between 3.21% and 7.81%, on average. Lenders usually require a 20% down payment and a maximum loan-to-value (LTV) ratio of 80%.
- Commercial Bridge Loan: These short-term business loans are meant for borrowers who don’t currently qualify for more permanent financing and need a temporary funding solution. Many borrowers use them as a construction loans. Commercial bridge loans usually have 12-36-month terms, higher interest rates ranging from around 6.00% to 11.00%, and other fees. Some come with prepayment incentives, though. Lenders typically require a maximum LTV ratio of 75% and 10% to 20% down payment. Loans cap out at around $50 million.
- SBA 7(a) Loan: These fixed-rate loans are often used to buy real estate, refinance current business debt, or purchase office furniture and supplies. They have a maximum term of 25 years and cap out at $5 million. They also come with a prepayment penalty for terms under 15 years. Interest rates are currently around 4.75% to 7.00%.
- SBA 504 Loan: With this loan, borrowers receive funds from a nonprofit lender (through a Certified Development Company) and a traditional lender at the same time. The maximum amount is $5 million, so most borrowers use these loans to grow their existing businesses or expand their buildings, facilities, and equipment. Borrowers cannot use these loans for debt consolidation, investment in rental real estate, or working capital. They have 10 and 20-year terms and varying interest rates.
- CMBS or Conduit Loan: Often sold on a secondary market, these fixed-rate loans have more relaxed credit requirements than other commercial loans. Borrowers can use them to buy income-earning properties, but they cannot use them as construction or land loan. These loans have competitive interest rates based on the US Treasury rates, the property value, quality of management and tenants, and business cash flow. Current interest rates are between 3.04% and 4.60%. Most have a term length of 30 years.
- Hard-Money Loan: A type of bridge loan, these loans mostly rely on the business property rather than the borrower’s creditworthiness. Borrowers often use them for things like flipping properties. They’re best for wealthier investors who have a solid repayment plan, high cash reserves, and high predicted revenues. These loans are available through private lenders or investors rather than banks. Standard loan terms are between 1 and 4 years. Interest rates vary from around 8.00% to 30.00%.
Commercial vs. Residential Loan
The biggest difference between a commercial and a residential loan is its purpose. Commercial loans are meant for people who want to use the property to generate income for their business. Residential loans are for individuals who plan to live on the property as their permanent or main dwelling.
- For business purposes not residential (ex. hotels, restaurants, office space, etc.)
- Offered through a traditional financial institution (ex. bank), investor, or private lender
- Available to business owners such as limited partnerships, developers, and corporations
- Loan terms are usually between 12 months and 10 years
- Amortization periods are usually longer than the original term (up to 30 years)
- Longer loan term and amortization periods usually mean a higher interest rate
- Uses a lien on the financed property to secure it
- Interest rates vary from around 3.21% to 7.81%, though some are higher
- Conventional CRE loans require a minimum down payment of 25% and a loan-to-value ratio of 65%-80%
- Maximum loan amount depends on the business and personal finances, as well as the property assessment
- Often have a prepayment penalty and other fees residential loans don’t have (ex. origination fee, survey fee, appraisal fee, loan-application fee)
- Balloon payment at the end of the loan term is typically at least twice as high as payments made during the original loan term
- Best for business owners with predictable income
- No private mortgage insurance or special programs through the FHA (Federal Housing Administration) or VA (U.S. Department of Veterans Affairs)
- Lenders usually require a debt-service coverage ratio (DSCR) of at least 1.25 (this indicates positive cash flow in the business)
- For residential purposes not business
- Usually have lower, fixed interest rates
- 15, 25, and 30-year terms
- Longer amortization periods meaning lower monthly payments but higher total interest costs over time
- Up to 100% loan-to-value ratio allowed for VA or USDA loans
- Typically require 20% down payment and a 660+ personal credit score
- Private mortgage insurance available to those who put down less than 20%
- Average interest rate is around 5.42%
- Loan repaid in installments until the loan term ends
- Closing costs between 3.00% and 6.00% of the cost of the home
- Most don’t have a balloon payment since the terms are set so the borrower repays the balance in full by the end
What are typical commercial real estate loan requirements?
Commercial real estate loan requirements vary based on loan type. However, most lenders rely on business finances, personal finances, and a property assessment to determine borrower eligibility. This includes things like:
- Borrower’s credit score
- Business’ credit score
- Several years’ financial statements
- Federal income tax returns
- Financial ratios for the business (ex. loan-to-value ratio or debt-service coverage ratio)
Here are the typical business mortgage requirements.
The main business finances to consider for a commercial loan are:
- Business income for mortgage qualification: Many lenders consider smaller businesses to be risky, so they assess things like business income and cash flow. Lenders often require 3-5 years’ financial statements and income tax returns showing consistent revenues.
- Credit score: A business’ credit score ranges from 1 to 100. Lenders use this score to set things like loan terms and interest rates. The minimum credit score for most commercial real estate loans is 75, but there are some exceptions. For example, an SBA 7(a) loan uses the FICO Small Business Scoring Service model and requires a 155+ credit score.
- Business entity classification: Lenders look for proof that a business is, in fact, a business. It must be a limited partnership, S corporation, or another type of qualifying entity. Sole proprietorships don’t qualify.
Lenders also look into an individual’s finances and credit score. Common factors include:
- Personal credit score: For most commercial loans, borrowers need to have a 660+ credit score. If they don’t, they might qualify for a loan with a cosigner or higher down payment. Purchasing a cheaper property can also help increase approval odds.
- Credit history: Lenders usually check the borrower’s credit history for major issues like defaults, bankruptcies, foreclosures, court judgments, and tax liens.
- Down payment: The standard down payment required for a commercial loan is 25%.
- Debt-to-income ratio: The borrower’s DTI ratio should be no more than 36% for most business property loans. If it’s higher, try to pay down other debts before applying for a new loan.
Finally, most commercial lenders require a business to meet the following requirements:
- Property equity: Borrowers often need to put down 25% to 30% equity in the property to secure a loan.
- Property insurance: This is usually required to protect the asset (property) against damages.
- Minimum occupancy status: Most lenders require the business to occupy at least 51% of the financed property.
- Debt-service coverage ratio: This is the business’ yearly operating income (net) divided by the yearly debt service, which includes the loan’s interest and principal balance. A DSCR below 1 indicates negative cash flow, so most lenders require a DSCR of 1.25 or above. For example, the net operating income on a $200,000 business property loan should be at least $250,000.
- Loan-to-value ratio: The business’ LTV ratio should be between 65% and 80%. Say, for example, the property is appraised at $500,000 and the lender requires a 70% LTV ratio. The borrower must put down $150,000 to get a loan for the remaining $350,000.
How To Get a Business Mortgage
Commercial lenders tend to be very thorough when determining whether to lend money for business purposes. In general, here’s how to apply for a commercial real estate loan.
Start by gathering the following information and documents:
- Proof of income – ex. tax returns, pay stubs, bank statements
- Personal and business credit check
- 3-5 years’ worth of business and personal tax returns
- Personal balance sheet
- Commercial property’s income and expenses to date
- Personal financial statement
- Business plan
- Property appraisal
- Current listing of any tenants, the space they occupy, and any corresponding dates
- Lease agreements and details
- Any other business financials, including those showing the debt-service coverage ratio and LTV ratio
- Overall time in business (typically must be at least 2 years to qualify)
- Value of collateral or assets
Depending on the type of commercial property loan, a lender might require different or additional information. For example, a hard-money loan usually requires a 30% to 40% down payment. This is because these lenders base their decision on the property’s value rather than the borrower’s creditworthiness.
Next, compare different commercial lenders for things like:
- Interest rates and loan terms
- Loan options
- Other fees (ex. origination fees or prepayment charges)
- Eligibility requirements
- Required documents
- Time to funding
- Online rating on sites like BBB or Trustpilot
Finally, read the terms and conditions, fill out the loan application, and wait for a response.
Tips for how to get the right loan
So, how to get a loan for a commercial property? Even if you haven’t been in business for long or have a low credit score, you can increase your approval odds. Here are some ways to improve your chances of qualifying for a loan with the best rates and terms:
- Boost your personal credit score with on-time payments, reduce credit utilization, etc.
- Pay down debt to lower your debt-to-income ratio
- Put down a higher down payment or more collateral for business loans
- Purchase a less expensive property
- Apply with a cosigner with great credit
If you’re not sure, here are some questions to help figure out if you qualify for a business loan.
Where to get a Commercial Real Estate Loan
Here are a few reputable commercial lending options to check out:
- Biz2Credit: Direct loans range from $250,000 to $6 million and have a starting interest rate of 10.00%. These are best for small business owners and entrepreneurs who haven’t been in business for as long and are looking to expand quickly.
- Fundera by NerdWallet: This is a marketplace lender, meaning they don’t offer direct loans. However, Fundera is convenient for people who want to explore their options in one place using one online application.
- Lendio: This platform works with over 75 lenders, including LendingClub and Bank of America, to help small business owners find financing. They offer different loan options such as commercial real estate loans, business lines of credit, and SBA loans.
- National Funding: Although this lender doesn’t work with startups, it can help those with slightly more established businesses secure funding up to $500,000. National Funding requires a lower credit score than other commercial lenders, but borrowers must show proof of business revenues exceeding $20,000 a month.
Business mortgage advantages and disadvantages
Business mortgage advantages and disadvantages vary based on the lender. For example:
- Biz2Credit: Funding is fast – within 48-72 hours. However, loans may have an underwriting fee of up to $400. Some loans have a closing fee. Borrowers must also have a minimum 660 credit score and be in business for at least 18 months to qualify. Business revenues must consistently exceed $250,000.
- Fundera by NerdWallet: This is a free service that works directly with lending specialists to help borrowers find their best financing option. However, borrowers won’t know the interest rate on a loan until after applying. Interest rates and closing fees can be high.
- Lendio: This platform makes it easy to find the best form of financing for your business. The initial application doesn’t require a hard inquiry. Borrowers can qualify for funding with a 580+ credit score and $12,000+ in monthly revenues. However, the loan application process is lengthy and requires more documents than other platforms.
- National Funding: Borrowers with a 575+ credit score and $20,000+ monthly revenues may qualify for funding. Some borrowers receive same-day approval and fast funding. Lending requirements vary by state and the rates aren’t clearly stated online. There’s also a 0%-2% origination fee.
|Fundera by NerdWallet||
Can I get a business mortgage?
Whether you can get a business mortgage depends on a few factors. To start, make sure you have a solid business plan, consistent revenues, good credit history, and a high enough down payment. If you’re not quite there yet, there are ways to improve your approval odds, such as by building up credit or applying with a cosigner. Whatever else, stay on top of your financials. If you’re looking for more information on business financing, check out this guide to business loans.