Commercial Real Estate Loans

What is a commercial real estate loan?

A commercial real estate loan is just another type of mortgage – it’s a loan to purchase a property for commercial purposes, with the loan secured on the property (called a lien).

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Funding Circle

✔ Funding: Borrow $25,000 to $200,000
✔ Minimum Credit Score: 700
✔ Loan term: 6-12 months
✔ Funding turnaround: 24-48 hours

Funding Circle offers affordable business loans with interest rates lower than alternative lenders with monthly repayment schedules for borrowers with good to excellent credit scores.

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SBA 7(a) loan

✔ Funding: Borrow up to $5,000,000
✔ Minimum Credit Score: 650
✔ Best For: SBA loans
✔ Funding turnaround: Varies.

The SBA 7(a) program features lenders such as Wells Fargo in their network and provides capped interest rates and long repayment term flexibility. Term loans and lines of credit access available. Typically, collateral will be required with a personal guarantee. Funding times vary and may be longer than most other lenders.

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How does a commercial real estate loan work?

Commercial real estate loans work the same way as a residential mortgage. You’ll need a down-payment for the property (typically 20-30%, though what you’re required to offer will vary) and once you’ve secured the property, you’ll pay a monthly payment to pay off the loan and the interest the loan incurs.

What are the different types of commercial real estate loans?

As with residential mortgages, there are a few different types of commercial real estate loans for you to choose from. They are:

• Permanent loans: These loans aren’t as scary as they sound – this is the term for the quintessential mortgage you get when you first purchase a property. These loans are almost identical to the mortgages you get for a home you’re going to use as a residence, in that they have long terms with variable or fixed rate periods.
• Bridge loans: bridge loans are best used when you’re looking to refinance or improve a property you already own, as they’re designed to “bridge” the gap in your cash flow and provide money over a short-term (usually less than 12 months) so you can make the improvements necessary.
• Hard money loans: Hard money loans are commercial real estate loans you secure from individuals or private companies, and are secured on the value of the property more than your ability to pay the loan back. If you are unable to pay, they simply seize the property and sell it. This makes them easier to secure, but the interest rate is usually higher than a more traditional form of commercial real estate loan, and you usually only have 1-5 years to pay it back.
• Blanket loans: Blanket loans are a good choice if you’re planning to buy multiple properties – for example, if you planned to buy three storefronts. This makes things easier since you have one payment, one set of terms, and one lender to work with, but comes with higher risk. If one business was to fail, your other two would be in jeopardy.
• SBA loans: The Small Business Administration (SBA) offers two loans that are suitable for real estate, their 7(a) loans and their 504 loans. The 7(a) is their most popular loan, though the 504 loan is usually the most suitable. The 504 loans are designed for major assets and are a great choice if you’re going to be improving a building within an established community.

What are the pros and cons of commercial real estate loans?

PROS

• Allows you to own property so you’re building your net worth rather than paying for a lease
• You can use them to make improvements that will increase the value of the property
• Rates for traditional loans are low, so your monthly payments may be less than you would pay if you rented
• You can change the property as your needs change without having to move to a new location
• You can lease units to other businesses or as residences, which is a favored way to build monthly revenue and net worth with a relatively low time investment

CONS

• You need extensive documentation to prove your creditworthiness to get lower rates
• You need the money for the down-payment, which can be a substantial amount of money to tie up in an asset
• It may not make a significant difference to how successful your business is
• It can take a long time to find the right property and the right funding
• Some of the commercial real estate loans that are easier to get are much more expensive
• If you can’t keep up with the payments you’ll lose the property

What can you use a commercial real estate loan for?

You can use a commercial real estate loan to purchase a new property for your business or to fund improvements on your current premises. You can use it on:

• New construction
• Bridge financing
• To purchase additional land
• Renovate your current business

What are the different types of commercial real estate?

You can use a commercial real estate loan to buy or improve:

• Retail stores
• Apartment buildings and multifamily units
• Offices and office complexes
• Hotels, motels, Airbnbs
• Medical facilities
• Land
• Warehouses, factories, and other industrial facilities

What kind of rates can I expect to pay on a commercial real estate loan?

This will vary depending on the type of loan you choose, your down-payment, and a range of other factors. However, you can generally expect the following rates:

• SBA 7(a) loan: 5.5 – 11.25%
• SBA 504 loan: 2.231 – 2.399%
• Bridge loan: 4.2 – 13.2%
• Hard money loan: 10-18%

Most commercial real estate loan rates are between 3% and 6%.

Commercial real estate loan calculator

Estimate monthly payments on a commercial real estate loan by trying our calculator.