How Commercial Real Estate Loans Work: What You Need To Know

As a business owner, buying real estate can be exciting and stressful at the same time. Your goal is to renovate your space or expand to a new location safely and conveniently.

Commercial loans offer a convenient way to grow your business, but you must learn how to navigate them. With proper knowledge, you will be well-equipped to secure the best business rates and terms and get the most from your loan.

Read on to learn how commercial real estate loans work.

What Is A Commercial Real Estate Loan?

Commercial real estate loans finance the buying or improving of business property. Qualifying for this loan requires you to use most of your property to secure the loan for personal business purposes. While you can lease part of your property, 51% should be your business.

Based on the conditions for a real estate loan, you can take a loan to buy an office building for your business, relocate or expand your retail space, buy a warehouse, or renovate a hotel you intend to operate from reputable lenders such as Financial Compound.

Types Of Commercial Real Estate Loans

You can access different types of loans for your business, each with different terms, rates, eligibility criteria, and application processes. The options to consider include the following:

  • Bank Term Loan

This loan is ideal for borrowers with an established bank relationship.

  • The SBA Loan

SBA loans are ideal for business owners who have already tried accessing loans from a traditional bank. Their access is through the SBA-7(a) and 504 loans.

SBA loans include the hard money loan and the bridge loan. Hard money loans, offered by private companies, are ideal for borrowers who do not qualify for traditional financing. Bridge loans are short-term financing solutions when your business requires cash flow to refinance an existing property or secure longer-term financing.

  • Line Of Credit

You qualify for a line of credit loan if you own property and want to borrow against your equity.

  • Portfolio Business Loan

You qualify for a portfolio loan if your business owns several facilities you use for your purposes. These loans are ideal for landlords owning several properties on lease to tenants.

Selecting a Commercial Real Estate Lender

When trying to secure a commercial real estate loan, you will have several lenders to choose from, and finding one offering what you want with affordable rates and standards is ideal. This is so that you will maintain this relationship for as long as you will take to repay your loan. When selecting a commercial real estate lender, consider the following factors:

  • Availability of loan options
  • Origination fees
  • Interest rates
  • Documentation requirements
  • Prepayment penalties
  • Bad credit options
  • Customer complaints and better business bureau ratings

Qualifications For A Commercial Real Estate Loan

The requirements for a commercial real estate loan are different from your home loan as you will use the property for business purposes and pay back using the revenue generated. Here are some qualifications for a commercial real estate loan.

Equity In Property

Before accessing commercial real estate loans, you need up to 30% equity in the property. A down payment of 25% or more is feasible if purchasing the property. In addition to equity, your lender will confirm your property or collateral insurance for security against damages. They will also check your title deed for claims against your property.

Business Income Versus Expenses

When processing your application, lenders want to be confident that you can repay every month. This they will do by checking your income against your expenses through the debt service coverage ratio (DSCR), which should be 1.25 or higher.

Business Credit Score

Your business credit score determines how successfully you can repay your loan. Most conventional loans require a minimum score between 660 and 680 to qualify for a loan. Your lender will also check your personal credit score when you provide a personal guarantee for your loan.

To further establish your loan security, the lender will check your credit risk based on your years of business operation. If you have been in business for a year or two, your lender can be confident that your business revenue will be the primary source of your loan repayment.  

Select The Right CRE Loan

A commercial loan is ideal for financing your business property. Before settling for a loan, compare your options to get the one that matches your business needs. You should also compare the lenders’ rates, terms, and services to be confident that you are settling for the best to take your business to the next level.

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