Commercial Real Estate Loans: Types, Rates, and How To Apply

Whether a startup company is moving into a commercial building for the first time or an outdated warehouse needs to be brought into the 21st century, there comes a time when the next step for a small business owner is to build, purchase, or update their commercial space. Because most businesses don’t have the cash flow to pay out of pocket, a commercial loan is critical to taking this next step toward growth.

Small business owners should know their options, shop around, and find the money they need with the best rates and terms. The process can be overwhelming, but we’ll break down the different types of commercial real estate loans, the associated terms and rates, and what to expect during the application process.

SBA CDC/504 Loans

The Small Business Administration, or SBA, is known for providing low-interest, long-term loans to business owners. For the purchase of commercial real estate, there are few programs out there better than the SBA CDC/504 loan program.

How Do CDC/504 Loans Work?

SBA loans are acquired through an intermediary lender. These lenders are more willing to take on the risk of loaning money to small businesses because a portion of the loan is guaranteed by the government. An intermediary can be an SBA-approved bank or even a nonprofit organization.

CDC/504 loans are a bit different in that there are two lenders involved in the process. A Certified Development Company, or CDC, is regulated and certified through the SBA. These nonprofit organizations are tasked with promoting economic development, and this is done primarily through commercial loans with favorable rates and terms.

With this type of loan, the CDC provides 40% of the total project costs. The borrower must find another lender, such as a bank or credit union, to provide 50% of the project costs. It is then up to the borrower to pay the remaining 10%.

Loan proceeds can be used toward purchasing commercial real estate, buying land or paying for land improvements, the construction of new facilities, renovating existing commercial properties, or purchasing long-term machinery. Old debt related to the purchase of new property or upgrading facilities can be refinanced with a CDC/504 loan.

SBA CDC/504 Loan Terms, Rates & Down Payment

The maximum loan amount distributed through this program is $5 million. The interest rates on CDC/504 loans are based on the market rate of 5-year and 10-year Treasury issues. As of October 2018, interest rates will not exceed 5.25%. Interest rates are fixed, and there are no balloon payments. Repayment terms of 10 years for equipment and 20 years for real estate are available with CDC/504 loans. It’s important to note that these rates and terms apply only to the 40% portion funded by the CDC.

The required down payment is 10% of the project cost but this can rise up to 30%. Typically, the collateral for the loan is the project itself and no additional collateral is needed in most cases. A personal guarantee is required by all owners with at least a 20% stake in the business.

SBA 504 Loans

Borrowing Amount

No maximum, but the SBA will only fund up to $5 million

Term Lengths

10 or 20 years

Interest Rates

Fixed rate based on US Treasury rates

Borrowing Fees

  • CDC servicing fee, CSA fee, guarantee fee, third party fees (however, most of these fees are rolled into the interest rate or cost of the loan)
  • Possible prepayment penalty

Personal Guarantee

Guarantee required from anybody who owns at least 20% of the business

Collateral

Collateral required; usually the real estate/equipment financed

Down Payment

10% – 30%

SBA CDC/504 Loan Borrower Requirements

To qualify, the business must meet the SBA’s definition of a small business. The net worth of the business should not exceed $15 million, and the average net income should be $5 million or less after federal taxes. The business may also have a certain number of employees to qualify as a small business, but this number varies by industry.

All businesses must be for-profit and should not be engaged in illegal or passive activities. As previously mentioned, all owners with a stake of at least 20% must sign a personal guarantee. Credit score is a factor in qualifying for the CDC/504 loan program, and while there are no minimums, generally a score of 680 or higher is recommended for the best chance of approval. The borrower should have no defaults on prior government-backed loans, foreclosures, or bankruptcies.

Where Do I Find SBA CDC/504 Loans?

Business owners interested in obtaining a CDC/504 loan can find a participating CDC through the SBA website. Applicants can also get a referral to an SBA-approved lender through their own financial institutions.

How To Apply For A CDC/504 Loan

An application will need to be submitted to an SBA-approved CDC. Along with the application, paperwork will be required by the business. This includes but is not limited to personal financial statements, business and personal income tax returns, income statements, and purchase agreements if the loan is being used to purchase an existing building.

Is An SBA CDC/504 Loan Right For Your Business?

An SBA CDC/504 loan is a great option for any small business looking to expand through the purchase, upgrade, or construction of new facilities. High limits, low down payments, and competitive terms and rates make this one of the best commercial real estate loans.

However, the process for obtaining one of these loans is lengthy. Any small business owner that needs funding fast should consider other options. Small business owners that would prefer to work with just one lender should also look into other types of loans. Learn more about the SBA CDC/504 loan program to make the smartest financing decision for your business.

SBA 7(a) Loans

The CDC/504 loan isn’t the only program offered by the SBA to purchase or update commercial real estate. The organization’s most popular loans through the 7(a) program can also be used for this purpose.

How Do SBA 7(a) Loans Work?

7(a) loans are the most popular SBA loans and for good reason. With low interest rates, lengthy repayment terms, and flexibility in how the funds are used, these are easily one of the best loan options on the market today.

SBA 7(a) loans can be acquired through intermediary lenders. Up to 85% of the loan is guaranteed by the SBA, taking the risk off of the lender. This allows intermediaries to provide competitive loans to small business owners.

SBA 7(a) loans can be used for just about any business purpose. This includes the purchase of commercial real estate, financing equipment, acquiring a new business or franchise, or using for working capital.

SBA 7(a) Loan Terms, Rates & Down Payments

Up to $5 million in financing is available through the SBA 7(a) program. Interest rates are based upon the base rate plus an added percentage of no more than 4.75%. When purchasing real estate, the maximum repayment term is set at 25 years.

Loan Amount Less Than Seven Years More Than 7 Years

Up to $25,000

Base rate + 4.25%

Base rate + 4.75%

$25,000 – $50,000

Base rate + 3.25%

Base rate + 3.75%

$50,000 or More

Base rate + 2.25%

Base rate + 2.75%

Down payments for SBA 7(a) loans typically range between 10% and 20%. In some cases, collateral is required. Loans for $25,000 or less do not require collateral. Personal real estate can be used as collateral if needed. As with other SBA loans, a personal guarantee is required.

SBA 7(a) Loan Borrower Requirements

As with the SBA CDC/504 loans, all businesses receiving an SBA 7(a) loan must fall under the organization’s definition of a small business.

SBA 7(a) loans require the borrower to have a good credit score. A minimum score of 680 is typically recommended. Bankruptcies, foreclosures, and defaults on government-backed loans typically disqualify an applicant. A reasonable explanation for any negative items on a credit report is also expected by any SBA-approved intermediary.

Where Do I Find SBA 7(a) Loans?

SBA 7(a) loans can be obtained through an SBA-approved intermediary lender. A lender can be found through the SBA’s Lender Match service, an online loan broker, or through a referral from a small business owner’s financial institution.

How To Apply For An SBA 7(a) Loan

An application will need to be submitted to the chosen intermediary lender. Similar to CDC/504 loans, the proper paperwork will need to be submitted with the application. An online service such as SmartBiz can also be used to apply for SBA 7(a) loans.

Is An SBA 7(a) Loan Right For Your Business?

The SBA 7(a) loan is one of the most flexible options for small business funding, making it an ideal choice for most businesses. However, 7(a) loans are not attainable if the business owner has a low credit score. If fast funding is needed to scoop up a commercial real estate deal, other options may need to be considered, as approval, underwriting, and funding SBA 7(a) loans can take several months. Still undecided? Read on the learn more about SBA 7(a) loans for small businesses.

Bank Commercial Mortgages

When consumers want to purchase real estate, they usually head to the bank. For small business owners, banks offer mortgages that can be used to purchase commercial property.

How Do Bank Commercial Mortgages Work?

Commercial mortgages through traditional financial institutions are similar to mortgages for residential property with one big exception: commercial mortgages can be harder to obtain.

This is simply because commercial mortgages are not backed by the government. Residential mortgages are backed by entities like Freddie Mac and Fannie Mae. This is not the case with commercial mortgages, making them a bigger risk for banks. With that said, it isn’t impossible to get a commercial mortgage, but it’s important to understand that the process can be time-consuming.

With a commercial mortgage, banks lend a certain percentage of the property value to the borrower. The borrower will then pay this loan back over a set number of years, along with interest. Because these loans are riskier for lenders, commercial mortgage interest rates and down payments may be higher than other types of commercial real estate loans.

Bank Commercial Mortgage Terms, Rates & Down Payments

Interest rates vary from lender to lender and are also affected by the applicant’s creditworthiness. With good credit, though, an applicant can receive interest rates around 5% to 7%. There is no maximum loan amount, although the approved amount is based on the borrower’s ability to repay the loan.

Typically, commercial mortgages are available for 65% to 85% of the property’s LTV ratio. Depending on the loan selected, the borrower will be required to pay 15% to 35% as a down payment. The typical maximum maturity for commercial mortgages is 30 years, but terms may be longer or shorter depending on the lender selected.

Bank Commercial Mortgage Borrower Requirements

Credit requirements vary by lender, but applicants should have a score of at least 700 for a higher chance of qualifying. There should be no major negative items, including foreclosures or bankruptcies, on the applicant’s credit report.

Where Do I Find Bank Commercial Mortgages?

Bank commercial mortgages can be obtained from most financial institutions. Small business owners should start with banks and credit unions with which they already have an existing relationship. Potential borrowers can also compare rates, terms, and requirements across financial institutions online before applying.

How To Apply For A Bank Commercial Mortgage

To apply for a bank commercial mortgage, applicants can call, go online, or visit their local branch to get the process started.

Much of the same paperwork required for SBA loans will be needed to apply for a commercial mortgage from a bank. This includes business and personal income tax returns, and personal and business financial statements.

Is A Bank Commercial Mortgage Right For Your Business?

Bank commercial mortgages are a good choice for anyone that needs a loan that exceeds the $5 million limits put in place through SBA lending programs.

Commercial mortgages from financial institutions can take months from application to funding, so other options should be sought if quicker approval and funding is needed. Another loan option may be better if the applicant’s score falls below 700. Small business owners that don’t have a lot of money to use toward a down payment may also want to consider other loans.

Commercial Bridge Loans

While the previous commercial real estate loans were long-term options, sometimes a short-term loan just makes more sense. If that is the case, a commercial bridge loan fits the bill.

How Do Commercial Bridge Loans Work?

Sometimes, opportunities arise and business owners have to take action fast or get left in the dust. Traditional commercial real estate mortgages and SBA loans can take weeks or even months to get approved and funded. A hot real estate deal could be gone from the market much sooner than that.

If commercial real estate funding is needed fast, a commercial bridge loan will get the job done. This is a short-term funding option that comes with short turnarounds, even as short as a few days. This allows a small business owner to move quickly on a deal without having to shoulder the entire cost.

However, even though funding is fast, so are repayment terms for bridge loans. These loans aren’t spread out over 20 or 30 years. Instead, interest payments are made over a short period of time, such as 6 months or 1 year. At the end of this period, the balance will need to be paid in full. This can be paid in cash, or the business owner may opt to refinance the loan.

Commercial Bridge Loan Terms, Rates & Down Payments

There are no maximum loan amounts for commercial bridge loans. Most lenders will provide up to 90% of the Loan-to-Value, leaving the borrower with just 10% to pay as the down payment. However, other lenders may fund just 80% of the LTV, leaving the borrower with the remaining 20% to pay as a down payment.

Interest rates vary by lender but generally start around 6.5%. Some lenders may have interest rates of 9% or even higher. Loan terms also vary by lender but may be as short as 6 months. Six months and 1-year repayment terms are typical, but some lenders may offer slightly longer terms.

Commercial Bridge Loan Borrower Requirements

Bridge loans have less stringent borrower requirements than other types of commercial real estate financing. An applicant’s credit score should be at least 650 but higher scores yield better interest rates. Borrowers must also be able to pay back the loan at the end of the short repayment term either by paying the balance in full or refinancing the loan.

Where Do I Find Commercial Bridge Loans?

Commercial bridge loans can be obtained from banks, credit unions, and even online lenders. Small business owners should begin at their own financial institutions. If commercial bridge loans aren’t available there, business owners can look into other local institutions or compare options online.

How To Apply For A Commercial Bridge Loan

There are fewer requirements for commercial bridge loans versus getting a traditional bank mortgage or SBA loan. However, the Debt Service Coverage Ratio (or the amount of cash flow to pay current obligations) will be considered. Some lenders may also require applicants to have previously used a short-term loan option to finance commercial real estate, but this is dependent upon each lender’s specific requirements.

Is A Commercial Bridge Loan Right For Your Business?

A commercial bridge loan is a reasonable choice for anyone who needs to obtain financing quickly. It is usually the best option for a business owner that needs to move fast to take advantage of a great real estate deal that will sell quickly. This type of loan is not a good choice for anyone who wants to obtain long-term financing.

FAQs About Commercial Real Estate Loans

What type of commercial real estate loan has the best rates and terms?

With interest rates at just over 5%, SBA CDC/504 loans have some of the best commercial real estate loan rates on the market. Combined with just 10% down and a 20-year term, a 504 loan is one of the most affordable loan options for small business owners. It is important to note, however, that the additional lender contributing 50% to the total project cost should also have competitive rates to keep the loan cost as low as possible.

SBA 7(a) loans are excellent alternatives. Though the interest rates are slightly higher, they remain competitive. With just 10% to 20% down and a 25-year term, this is also one of the best options for small business owners.

Can I get a commercial real estate loan without a down payment?

Most commercial real estate loans require a down payment. While some private lenders may offer “no money down” loans, added fees, interest rates, and shorter terms make these loans more expensive in the long-term.

There are many loan options that require just 10% down and come with low interest rates and affordable monthly payments spread over 20 or more years. These are the best, most affordable loans to pursue.

What is the fastest way to get a commercial real estate loan?

One of the fastest ways to get funded is through a commercial bridge loan. However, these loans are short-term and will require pay-off or refinancing in a much shorter period of time.

Traditional bank mortgages and SBA loans can often take months. However, the SBA Express loan program is available in amounts up to $350,000 and comes with an approval within 36 hours. Another option is applying for an SBA loan via SmartBiz, which can significantly cut down the timeline for SBA loans.

I’m a veteran. What are my best options for commercial real estate loans?

The SBA offers the Veterans Advantage program for military veterans, service members, reservists, National Guard members, and qualifying spouses. Through this program, veterans enjoy the same benefits of the 7(a) loan program along with reduced fees.

I have bad credit. Can I get a commercial loan?

To qualify for loans with the best rates and terms, an applicant’s credit score should at least be in the high 600s. While some private lenders may opt to loan to applicants with low credit scores, higher down payments could be required and terms and rates may not be as favorable.

Small business owners with bad credit should work to improve low credit scores in order to take advantage of the most affordable commercial loan options.

Final Thoughts

Getting a commercial real estate loan takes time but it doesn’t have to be difficult. By shopping around, knowing what rates and terms to look for, and working with a reputable lender, the process for obtaining a loan can go smoothly, providing business owners with the funding they need to grow their businesses.

The post Commercial Real Estate Loans: Types, Rates, and How To Apply appeared first on Merchant Maverick.

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