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How to Qualify and Apply for a Commercial Real Estate Loan

By Mark Lauer Reviewed By Mike Lucas
By Mark Lauer
By Mark Lauer Reviewed By Mike Lucas

Buying or investing in commercial real estate can be both a thrilling and sometimes stressful endeavor. Without a commercial mortgage loan, though, most business owners don’t stand a chance of purchasing a commercial property. 

Thankfully, commercial real estate loans are available that can make these dreams a reality—even if you don’t have cash or other assets to secure the loan.

Many commercial real estate financing options are offered at affordable rates and agreeable terms. Below, we’ll break down the various types of commercial property loans, how you can apply for them and how you can get approved without any hassles or headaches.

What Are Commercial Real Estate Loans?

Commercial real estate (CRE) loans help business owners establish income-producing properties used for business purposes.

As with a residential real estate loan, a commercial property loan is a type of mortgage that is secured by a lien on the commercial property.

Investing in commercial real estate can be a costly affair because many office buildings and retail outlets are sold at a higher price than their residential counterparts. However, if secured, a commercial property can provide a steady passive income through numerous cash inflows, including:

  • Tenant rent
  • Tax benefits
  • Depreciation
  • Proceeds from sale
  • Operating expense recovery
  • Parking, vending and service fees

How Do Commercial Real Estate Loans Work?

Commercial real estate loans are put toward the purchasing of existing or new properties. They also can be used after the fact to develop, construct or renovate a physical property or the land. Additionally, you can refinance a loan on an existing commercial property. 

Examples of eligible property types include:

  • Office space
  • Building
  • Business complex
  • Shopping center
  • Retail shop

Often, individuals alone can’t take out a commercial real estate loan. Instead, they’re reserved for incorporated business entities.

Additionally, some lenders may require the borrower to occupy the space, so if you’re looking to buy property as an investment, be sure to read the fine print. 

As many business owners know all too well, investing in commercial real estate can prove costly. Thankfully, commercial real estate loans help you pay for these costs. Generally, with these loan types, lenders put a lien on your purchased property. If you default on the loan or cannot make payments, the lender can seize the property to recoup their losses.

Since commercial real estate loans tend to range in the 6, 7 and 8 figures, they’re inherently risky for creditors. If you don’t make good on your pledge to repay the loan, then the lender is out a substantial sum of money.

To mitigate the inherent risk of big-money lending, commercial real estate loan lenders will require a down payment. Conventional lending institutions often require a down payment between 15%-35%, depending on the specific lender. In some cases, certain loans backed by the U.S. Small Business Administration (SBA) may be available with down payments as low as 10%.

Navigating Commercial Real Estate Loan Terms

One of the least-understood aspects of commercial real estate borrowing is the repayment term. Far too often we find that business owners inexperienced in the world of commercial real estate lending are eager to jump on any offer extended to them.

You do need to pay attention to repayment terms to understand the effective cost of the loan.

Generally, commercial real estate loans are offered on long-term contracts with repayment terms ranging between 10 and 30 years. However, some short-term real estate loans exist with repayment terms of 5 years or less. The downside, though, is that these are typically hard money loans with much higher interest rates.

Be sure you understand your interest rates, fees and terms. Ensure you get the right loan for you by clearly understanding what your loan will cost you. 

Types of Commercial Real Estate Loans

There are several types of commercial real estate loans, each having their benefits and drawbacks. No matter the type of business you own, if you’re in the market for a business real estate loan, you might consider applying for one of the following :

  • SBA commercial real estate loans, including 7(a) and Certified Development Company (CDC) 504 loans
  • Conventional commercial mortgage
  • Commercial bridge loan
  • Hard money loan

 Of course, it is possible to finance your commercial real estate investment project through cash reserves. However, many business owners , at some point or another, rely on one of the options above.

Person putting coin into house

SBA Commercial Real Estate Loans

One of the best commercial real estate loans is a standard SBA 7(a) loan or a CDC/SBA 504 loan, both of which are partially secured by the Small Business Administration (SBA).

The former is a general-purpose loan for small businesses that can be put toward any business-related expense, while the latter must be spent on capital-intensive property (usually real estate or renovations).

These SBA loan options are meant for long-term borrowers. Term lengths range from 5-25 years, and interest rates for SBA loans cannot exceed a maximum percentage. For instance, standard 7(a) loans have a maximum interest rate ranging from the prime rate plus 2.25% to the prime rate plus 4.75%, depending on the loan term and amount. 

Conventional Commercial Mortgage Loan

Unlike SBA-backed commercial property loans, conventional commercial mortgages are a type of commercial land loan that is issued exclusively by banks. These loans tend to be more difficult to qualify for, and generally, have strict commercial real estate loan requirements concerning years in business and annual revenues.

For this reason, they often aren’t the first choice among new business owners.

  • Examples of Conventional Commercial Mortgages

    While interest rates and repayment terms vary depending on various factors, including lender and loan type, here are some commercial real estate loans offered through conventional banks. 

    With Bank of America, commercial real estate loans for purchasing or refinancing start at $25,000, with interest rates as low as 3% with a fee of 0.75%, as of April 17, 2020. Loan terms are available for up to 10 years with a balloon payment at the end of the term. If you want to be done paying the loan by the end of the term, the bank offers a fully amortized loan to be repaid in 15 years, eliminating a balloon payment. 

    In contrast, Santander Bank offers owner-occupied commercial real estate mortgages with repayment terms up to 25 years, with financing available for up to 80% of the property value or purchase price.

Commercial Bridge Loans

If you only need a short-term financing solution, consider applying for a commercial bridge loan. This type of loan quickly reaches maturity, at which point the loan must be repaid in full or extended into the long term.

Hard Money Commercial Real Estate Loans

Hard money commercial real estate loans are another form of short-term financing. They’re offered at higher interest rates and are targeted toward young businesses that cannot qualify for conventional commercial property loans.

Person putting coin in house vs percentage scale

How to Get a Commercial Real Estate Loan

If you need a loan to buy a property, then you should start taking the steps necessary to get approved for a commercial real estate loan, such as an SBA CDC 504 loan or an SBA 7(a) commercial real estate loan. Here are some tips to help guide you through the process.

Know Your Credit Score

Before you sign on the dotted line of a small business real estate loan, there are several key pieces of information that you need to consider. First among them is your business credit score.

These scores are issued by credit reporting agencies, such as Dun & Bradstreet, Equifax and TransUnion and provide a summary of your trustworthiness to lenders.

Although personal credit scores range from 300 to 850, business credit scores often follow a 100-point scale that can be found below:

  • Very Poor: 0-20
  • Poor: 21-40
  • Fair: 41-60
  • Good: 61-80
  • Excellent: 81-100

If you want to qualify for commercial real estate loans with no down payment, then you should fall safely within the highest business credit score bracket. The better your score, the more likely you’ll get approved for the most competitive interest rates and terms.

Other Commercial Real Estate Loan Requirements

Your business credit score isn’t the only thing that determines your eligibility for a CRE loan. Other factors that come into play during the commercial real estate loan process include:

  • Overall time in business
  • Value of collateral assets
  • Debt-to-income ratio
  • Annual revenues

For a well-rounded application, you’ll want to ensure that you account for each of these elements.

Aim to be in business for at least 2 full calendar years before you apply for a major loan. Your gross income should exceed your total debts. This way, creditors will have confidence in your ability to repay the loan.

Compare Lenders of Commercial Mortgages

Today, banks aren’t the only game in town. While your first thought might be to visit your local bank branch, weigh every option. For instance, if your business is in the early stages of growth, you may be surprised by the flexibility and affordability of online lenders. 

Do your homework before settling on a lender. Consider banks as well as credit unions and online alternative lenders to find a loan with qualification criteria, repayment terms and an interest rate that works for your business.

Applying for a Commercial Real Estate Loan

When it comes to commercial real estate loans, there’s no shortage of options. Should you decide to apply, make sure that the repayment term doesn’t lock you into a never-ending debt spiral and that the interest rate won’t upset your debt-to-income ratio.

Also consider that saving up for a commercial real estate loan down payment is a major milestone in every business owner’s growth trajectory, and one that is usually necessary to meet lenders’ qualifications.

For the best results, research lenders and their loans to see which offers the best terms for your real estate financing needs.

Mark Lauer Business Advisor at Fast Capital 360
Mark Lauer has been a Business Advisor at Fast Capital 360 since the very beginning. He’s helped thousands of businesses reach their potential, grow and thrive, forging strong relationships along the way.
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