Figuring out loans for commercial and business purposes can be tricky for first-time borrowers. They are structured differently than home mortgages, especially around policies defining borrower qualifications and repayment schedules. Borrowers typically face a great deal of scrutiny in terms of their business cash flows and personal finances before getting approved for commercial real estate loans (also called CRE loans). The underwriting process also tends to be super complicated.
We have prepared this guide to help potential borrowers navigate CRE loans with ease. You will learn about:
- Types of commercial real estate loans (and their suitability)
- Pros and cons of different commercial lenders
- Process of getting a loan for a commercial property
What Is a Commercial Real Estate Loan? How Is It Different From a Home Mortgage Loan?
Borrowers choose a commercial real estate loan to purchase or refinance a property that would be used for generating profit rather than self-occupation. Like home mortgages, commercial loans also establish a lien on the property held as collateral, but the lending terms are different because of the risk variables.
When dealing with a generic home mortgage loan, one of the lender’s prime concerns is checking the borrower’s ability to repay. A routine home loan approval process covers the verification of an applicant’s income source, credit score, and accumulated debts to determine the lending risk.
The risk typologies cast a wider net in the case of commercial real estate loans. Besides your income or revenue stream, a commercial lender has to analyze other risk metrics like the volatility of the business (if applicable), capitalization rate, future cash generation, and long-term value retention of the collateral, especially if it’s a commercial-zoned property.
Source: Karolina Grabowska
Compared to residential-purpose loans, CRE loans have:
- Lower loan-to-value (LTV) ratio—Home mortgages provide up to 97% of the financing, but most commercial lenders offer between 50% and 75%. That’s because they want the borrower to have more adequate interest in the property
- Shorter tenure—Commercial real estate loan tenures are usually up to 10 years (as against 30 years for home loans), although packages geared toward business entities are often renewable
- Higher interest rate—CRE loans are typically 1–2 interest points higher than residential mortgages
Commercial Real Estate Loan—Types of Packages
Commercial lenders offer different types of real estate loans with terms tailored to the borrowing intent. There are primarily five categories of loan packages you can apply for:
- Income-producing commercial mortgage
- Owner-occupied commercial loan
- Commercial construction and/or rehab loan
- Business loan for real estate
- Commercial bridge loan
Income-Producing Commercial Mortgage
Most people use commercial real estate loans to buy properties that contribute to their investment portfolios. Take commercial loans for rental properties as an example—the investment would not only bring periodical rental income but also provide long-term capital appreciation to the borrower.
The lending terms for income-producing commercial mortgages typically depend on the property profile. Versatile real estate like apartments, retail buildings, or cold storage units can be amortized for a long duration—say over ten years. Specific-use properties, such as tennis courts or movie theaters, are considered high-risk and have shorter amortization schedules requiring large payments.
Owner-Occupied Commercial Real Estate Loan
Owner-occupied commercial real estate (OOCRE) loans work for homeowners who use more than half (at least 51%) of the property’s leasable space to run their business.
OOCRE loans are serviced on the basis of the borrower’s business revenue and personal credit standing, so you can expect lenient terms like:
- Long repayment schedules
- Lower interest rates
Small business owners usually use OOCRE loans to reduce their tax burden by writing off property-related expenditures from their profit, although adjustments may be needed if it’s categorized as a non-arm’s length transaction.
Source: Tima Miroshnichenko
Commercial Construction and/or Rehab Loan
Commercial construction and/or rehab loans are used mainly by property investors for:
- Developing or redeveloping real estate (residential or commercial use)
- Flipping property
Since the income from these activities generally accrues after the sale of the property, the lenders do not ask for amortized repayment. These loans are short-term, and in most cases, you have to commit to interest-only monthly payments and a balloon repayment on maturity.
Almost all conventional construction loans require a large down payment and heavy documentation throughout the tenure of the loan. In the case of extensive construction projects, traditional lenders (like banks and credit unions) advance the principal in stages after assessing the work in progress. The paperwork and verification requirements are milder when you’re dealing with non-traditional lenders like microfinance institutions and hard money lenders.
Business Loans for Real Estate
Entrepreneurs or entities looking to buy commercial land or set up a new office, factory, warehouse, or some other facility can be financed by business-purpose mortgages. You’ll especially find several convenient real estate loans for small businesses that struggle with infrastructure development. The repayment terms vary from lender to lender.
Small Business Administration (SBA)-backed loans offer the longest tenures for commercial real estate purchases, with a maturity period of up to 25 years.
Commercial Bridge Loan
Getting a loan approved in the commercial lending market is time-consuming, more so if you’re dealing with traditional lenders burdened by inflexible bureaucratic guidelines. A bridge loan is a short-term financing option for borrowers who need to secure a real estate property fast.
Say you’re eyeing a promising commercial property in a competitive market—you can close the deal quickly by using a non-traditional mortgage product like a hard money bridge loan. Hard money lenders operate privately and offer loans according to the value of the property. They have lax qualification and processing guidelines but charge slightly higher interest rates for convenience. You can get your bridge loan refinanced once you qualify for a traditional mortgage.
How To Qualify for a Commercial Real Estate Loan
The U.S. commercial real estate lending market is currently valued at $2.72 trillion, facilitated by hundreds of big and small lenders. Qualifying for a commercial real estate loan can be easy or difficult, depending on the lender you’re approaching. In the following sections, we have summarized the basic eligibility framework for the three popular categories of commercial lenders:
- Conventional lenders
- SBA-backed lenders
- Hard money lenders
Conventional Commercial Real Estate Lenders
Many banks and other traditional lending institutions offer commercial real estate loans that essentially act like first mortgages. You can approach both national and regional financial institutions depending on your convenience. The typical lending terms are listed in the table below:
|Aspect||Conventional Commercial Real Estate Loan|
|Principal||Up to $1,000,000|
|Down payment||25%–40% of the purchase price|
Traditional lenders usually state the following commercial property loan requirements for borrowers:
- Have excellent credit scores
- File tax returns regularly
- Gather copies of crucial documents like:
- Selected books of accounts
- Bank statements (dating back the last three to six months)
- Financial statements
- Third-party appraisal report of the target real estate
- Business plan
- Statement of assets and liabilities
- Submit the loan application form with the relevant documents attached
It can take a traditional lender 30–90 days to screen loan applications and decide whether they can service the request. Take a look at the pros and cons of commercial property loans acquired via traditional borrowing channels:
|• Competitive rates|
• Long-term loan packages
• Several lender options to choose from
|• Extensive paperwork|
• Slow-paced processing
• Difficult eligibility criteria
Small Business Administration (SBA) Lenders
The SBA has designed various loan programs to support the short-term and long-term funding requirements of entrepreneurs and small business owners. If you’re looking to finance the purchase of any commercial real estate, the 7(a) and 504 programs can work for you. Refer to the following table for more details:
|SBA 7(a)||7(a) loans offer broad-purpose financing for working capital, inventory, and fixed assets like land, building, and furniture. You can borrow up to $5 million. Key eligibility criteria include:|
• Qualifying as a “small business” as per SBA
• Having reasonable equity
• Demonstrating a need for the loan
You need to submit hefty paperwork to apply, which includes:
• Personal and business financial statements
• Ownership and affiliations
• Loan application history
• Business lease
• Business overview and history statement
• Projected financial statements
• Tax returns
|SBA 504||504 loans offer fixed-rate financing for long-term business assets that promote community and business growth and lead to job creation. You have to apply to a Certified Development Company (CDC) for this type of funding. You can borrow up to $5 million, although real estate related to certain energy projects can qualify for $5.5 million. Applicants are evaluated based on:|
• Feasibility of the business plan
• Management expertise
• Ability to repay
• Good character as a borrower
The documentation requirements are dictated by the CDC you’re dealing with
SBA loans have below-market interest rates, but they’re incredibly hard to get because of limited funding and a massive volume of applicants. The funding process for approved candidates takes 2–3 months.
Here are the pros and cons of SBA loans:
|• Low interest rates|
• Long-term funding
|• Rigid qualification guidelines|
• Complicated paperwork
• Slow-paced processing
Commercial Hard Money Lenders
Hard money lenders are alternative financiers like private investors and companies offering loans beyond bureaucratic limitations. They fill the funding gap in the commercial real estate lending market by:
- Processing loans faster
- Having less stringent eligibility criteria
- Downsizing the paperwork significantly
A common misconception among borrowers is that hard money lenders charge exorbitant rates. The truth is that the alternative lending market is super competitive. Most hard money loan products are priced reasonably to accommodate the demands of borrowers from various economic classes (who have otherwise been unsuccessful in securing funds via traditional routes).
The qualification requirements for hard money real estate loans revolve around the collateral rather than the borrower. Since the entire loan is collateral-backed, the lender will start by inspecting the financial characteristics of the property concerned. If they’re satisfied, they’ll extend a loan (tenure of 1–5 years) immediately and help you close the deal within a week or two. Out of prudence, certain hard money lenders may refuse to work with high-risk borrowers who have a high delinquency rate or rock-bottom credit scores.
Check out the dominant pros and cons of hard money property loans:
|• Fast funding|
• Easy to qualify for
• Less paperwork
|• Short tenures|
• Interest rates higher than conventional loans
Get a Commercial Real Estate Loan the Easy Way—Contact Hard Money Loan Solutions
Whether you’re a business or an individual property investor, Hard Money Loan Solutions (HMLS) can fund your real estate deal in a convenient and time-conscious manner. The lending group is based in Delray Beach, Florida, and has robust operating knowledge of the real estate market in the state. You can also consult HMLS lenders for borrowing advice tailored to your investment or business strategy.
HML Solutions focuses on building customer-forward relationships and has been rated 5 stars on Google. Many customer reviews attest that the group is a reliable source of primary funding for real estate deals. At HML Solutions, you get:
- Customized commercial loan packages—HMLS lenders have detailed discussions with borrowers before finalizing a loan package. Qualified applicants get a carefully organized commercial loan package with interest rates and repayment terms that work best for their situation
- Document-light processing—HMLS loans don’t require endless bundles of paperwork. Provide generic details about your intent, business, and collateral, and you’re done
- Quick access to funds—The team can manage quick funding even in difficult-to-service scenarios. Most applicants get the funds in their account within 3–10 days
HMLS lenders are veteran investors and entrepreneurs who see the value in good real estate investments over a borrower’s credit history. Bring them healthy collateral with enough equity holding, and you’ll most likely be approved for funding. Apply for an HMLS commercial real estate loan today to forward your deal.
Source: Tima Miroshnichenko
HMLS Interest Rates for Commercial Real Estate Loans
HMLS interest rates are quite at par with average commercial lending rates. Depending on the LTV ratio of your package, your interest commitment will be between 9.99% and 12%. You’d pay fixed-rate, interest-only payments throughout the tenure of the loan. The principal repayment accrues on maturity, but you also have the option to settle the loan anytime after six months with no prepayment penalty (in case you’re considering a bridge hard money loan).
The following table gives you an outline of what a standard HMLS property loan package entails:
|Parameter||What HML Solutions Offers|
|LTV ratio||Up to 70% of the appraised value or purchase price of the property (whichever is lower)|
|Down payment||Not required|
|Processing time||3–14 days|
|Origination fee||2% (or 2 points)|
HML Solutions funds any real estate property, including single- and multi-unit houses, condos, commercial land or building, and co-op units. The lenders also cater to other borrowing intents, such as:
- Financing and refinancing home mortgages
- Constructing or remodeling a property
- Managing bank foreclosures
- Cash-out financing
- Funding business acquisitions and startups
- Purchasing machinery
- Short selling
Reach out to HMLS lenders to learn more about their commercial and consumer loan products.
How To Get a Commercial Loan for Real Estate With HML Solutions
HML Solutions follows a transparent loan dispensing model consisting of to-the-point discussions and prompt communications. You have to go through three simple stages to get a commercial real estate loan:
- Pre-approval—Prospective clients fill out an online loan application form to request a direct phone call from an HMLS lender. Based on the info provided at this stage, the lender decides whether to go forward with the deal
- Real estate appraisal—If required, the lender inspects the current appraised value of the property to get an estimate of the risk factors and a serviceable LTV range
- Closure—If the client passes basic due diligence, HML Solutions extends them a tailor-made loan package. The group doesn’t back out of funding once a deal is approved officially
While HML Solutions is all about mutual profit-making, the lenders believe in humane transactions. If they cannot service a deal, they try to redirect the applicant toward available alternatives for funding. In case a borrower defaults on a payment during the tenure of the loan, they can approach HMLS lenders beforehand to rework the repayment schedule.
Can You Get a Commercial Loan on a Residential Property?
Small-time business owners are often conflicted over whether they can take out a commercial loan on a residential property they own. To be upfront, this type of funding request is a bit complicated for traditional lenders. Many banks have strict guidelines forbidding such transactions.
That being said, you can opt for lenders who offer multipurpose loans against the equity in your house. Such loans are usually designed to provide for renovation expenses, but certain lenders are okay with business financing as an intent. If you can’t find suitable lenders in your area, you should consider re-titling your property to qualify for a commercial loan.
You may not have much luck in the traditional lending market, but many hard money lenders are ready to take residential properties as a lien for business-purpose loans. Approach a lender with a solid repayment strategy so that they find your deal lucrative.
Remember that if you put your home on the line for commercial-purpose funding, you should opt for non-recourse loans that come with no personal guarantee. Recourse loans hold you personally liable in case of default, which means you may lose your other personal assets to cover your commercial debt.
Featured image source: Gustavo Fring