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Cheat Sheet for Business Owners: The 6 Best Commercial Real Estate Loan Types

The 6 Best Commercial Real Estate Loan Types

Do you need a commercial real estate loan to buy a business property? Ensure you get the best loan. Here are the 6 best type of commercial loans.

As of 2018, there are 30.2 million small businesses registered in the United States. And that number continues to grow.

With more businesses comes more business properties. Do you need a commercial real estate loan to buy a business property? It’s important you get the best loan possible to start your business off on the right foot.

Read below to discover the six best types of commercial real estate loans.

1. SBA 7(a) Loans

SBA 7(a) loans are through the U.S. Small Business Administration. These are by far the most common loans when it comes to commercial real estate loans.

These loans provide up to $5 million worth of funding. The SBA will link you with an SBA affiliated lender to receive the loan. SBA 7(a) loans can last up to 25 years.

To qualify, you must meet the following commercial real estate loan requirements:

  • Have a down payment of at least 10 percent
  • Have less than 500 employees
  • A 680 credit score or higher
  • Your annual receipts total less than $7 million
  • No personal or business foreclosures or bankruptcies

You can use these to refinance or buy existing commercial property for your business. You may also use an SBA 7(a) loan for constructing a new building.

2. SBA 504 Loans

SBA 504 loans are commercial real estate loans through the U.S. SBA. These loans pair banks or community development corporations up with small businesses.

Your total SBA 504 loan amount is actually two separate loans. Forty percent of your loan is through a community development corporation. Fifty percent of the loan is through a traditional bank.

You have to to pay the remaining 10 percent as your down payment.

To qualify, you must meet the following commercial real estate loan requirements:

  • Occupy at least 51 percent of the property’s commercial space
  • Have a net worth less than $15 million
  • A 660 credit score or higher

These loans work best for real estate that is owner-occupied. SBA 504 loans have repayment terms of up to 25 years. Interest rates range from 4 to 6 percent.

3. Joint Venture Loans

Joint venture loans are a business agreement between participating parties. Each party agrees to develop the new business through contributing financial resources.

The parties share responsibility for the property and business. The parties also share in revenues, assets, and expenses. Joint ventures remain separate from each party’s individual businesses and properties.

Joint venture loans are for when a single party can’t finance the business venture on their own.

Investment firms and private investors will enter joint ventures with your small businesses.

Things included in a joint venture agreement include:

  • The purpose of the business
  • Terms of agreement
  • Capital contributions
  • Shares of profit and losses
  • Any other party obligations

Check out this joint venture business agreement template to help get you started.

4. Commercial Mortgage Bridge Loans

Commercial mortgage bridge loans provide short-term financing until you receive permanent financing. Businesses use these loans to provide flexibility. They can then concentrate on searching for the right long-term financing.

These loans come with higher rates and fees with shorter terms. They can be closed on within 10-30 days, giving you a quick option for financing.

To qualify for a commercial mortgage bridge loan, lenders will look for:

  • Annual net operating income
  • Debt service coverage ratio
  • Your total net worth
  • Financial statements
  • Appropriate cash reserves

Commercial mortgage bridge loans are a short-term solution. It’s important to keep in mind your exit strategy.

These loans are redeemable with the sale of a property or refinancing. You can also redeem them through a cash redemption from another source.

To learn if a commercial mortgage bridge loan is right for you, visit Assets America.

5. Multifamily Loans

Multifamily loans are another option for commercial real estate loans. These loans apply to business properties with five or more rental units. Most often, these loans are for apartment buildings or condominium developments.

You may use these loans to refinance or buy existing commercial property. Multifamily loans can also be for constructing a new building.

To qualify, you must meet the following commercial real estate loan requirements:

  • 700 credit score or higher
  • No recent bankruptcies or foreclosures
  • A net worth greater than your loan amount

A lender will look for debt service coverage ratio above 1.15. This is the property’s net operating income divided by the annual debt service. They will also look at both your loan to cost ratio and the loan to value ratio.

Aim to keep both of these rations under 80 percent.

6. Traditional Commercial Mortgage

Traditional commercial mortgages are the most conventional type of commercial real estate loans. These loans are like a home mortgage.

Traditional commercial mortgages don’t have a set cap for the loan amount. This allows you to finance your commercial mortgage no matter how big or small.

To qualify for a traditional commercial mortgage, lenders will look for:

  • A loan-to-value ratio under 85 percent
  • A down payment of at least 15 percent
  • Occupy at least 51 percent of the property’s commercial space
  • 700 credit score or above

These loans can be for buying or refinancing your business property. Lenders may ask that your business be up and running for a year before receiving a mortgage.

Because traditional commercial mortgages are through different banks the mortgage specifics will vary. You can expect interest rates between 4.75 and 6.75 percent and a repayment term of up to 20 years.

Picking the Right Commercial Real Estate Loan

Now it’s time to pick the right commercial real estate loan for your business.

When deciding what loan to choose, keep in mind a few important factors.

What is the interest rate? Will you need an investor or partner for this property? What happens to my business if I fail to pay back my loan?

If you answer these questions, you won’t go wrong with your commercial real estate loan.

Remember that buying property is an investment larger than your business.

Here are the main reasons to buy commercial property:

  • Stability of business location
  • Control over your brand and image
  • Financial leverage and tax benefits
  • Possible rental income from any tenants

Read this article for tips for buying commercial property to build your business.