What You Need to Know About Commercial Real Estate Loans

There are many types of loans and some can be used for multiple purposes. However, there are loans that are more targeted to help provide financing for specific uses. For example, a commercial real estate loan is a loan used for commercial purposes. If you are looking to get a loan that will get the money you need for an office, retail space, restaurant, or warehouse keep on reading to learn more about commercial real estate loans.

What is a Commercial Real Estate Loan?

If you have a small business, you probably are leasing some sort of commercial space for your retail business or have a warehouse for your products. However, some people decide to buy commercial space instead of leasing and most times a loan is needed for that.

Commercial real estate loans come with short repayment terms unlike residential loans. Typically, they have 5 to 20 years and a residential loan has a 30-year mortgage. There are a few uses you can use this type of financing such as to buy a building, construct a new facility, or expand or update an older property.

How to Get Your Commercial Real Estate Loan

It is a fairly simple process to apply for a real estate loan. A lender will start by checking your credit history and evaluate what property you are going to use for collateral. You might be required to submit a business plan that outlines what your plan and goal is on how you are going to use your loan. If you need to create a business plan, make sure it is filled with valuable information about your strategy, so you improve your chances are getting approved.

Before you apply make sure you have all the proper documents available such as the purchase contract, property blueprints, scope of work, project budget, and an assessment of the property’ existing condition.

The following documentation might also be required when applying so be sure to have them on hand as well such as your business balance sheet and tax returns, personal tax returns, and legal documentation.

Every lender has their own set of requirements and may even ask for more during the application and approval process. Be sure to have the documents ready as soon as you can to avoid any delays in the funding process.

How to Get Your Commercial Real Estate Loan Approved

Most of the time loan requests get rejected but there are certain steps you can take to avoid to it. Besides your business plan and the value of the collateral you provide, lenders use the following to make their decision.

  • Personal credit
  • Personal debt coverage
  • Business debt coverage
  • Personal debt usage
  • Business debt usage
  • Business revenue trend

Types of Commercial Real Estate Loans

There are a few primary types of commercial real estate loans that will help you achieve your goals.

Permanent Loans

This loan is similar to a traditional mortgage loan. You can get a permanent loan from any commercial lender and have a repayment term of five years or more.

SBA Loans

The Small Business Administration provides guarantees for some commercial real estate loans. There are two types of loan programs under the SBA which are SBA 7a loans and SBA 504 loans. These have low rates which make them a great deal for real estate.

SBA 7a loans are flexible and can be used for non-real estate financing needs. SBA 504 loans must be used to financing the purchase of commercial real estate or machinery and equipment, renovate an existing property or refinance commercial real estate debt.

Bridge Loans

Bridge loans are short-term commercial real estate loans. They can be used to cover immediate cash flow needs while the owner secures long-term financing. Repayment terms range from 6 months to 3 years. Taking out a bridge loan comes with high interest and putting up collateral as well.

Hard Money Loans

These loans are a type of financing used by real estate investors and are issued by private companies and individuals, not traditional banks. This loan is risky because you are putting up your commercial property as collateral. In the case that you default, the lender can seize your property.

The Bottom Line

Knowing what to expect before you apply for a commercial real estate loan can make the process a lot easier. Take the time to compare lenders and read the fine print to see if there are penalties or additional fees. Be sure to know the full terms before you begin the application process as well.