Commercial Real Estate Loan

A commercial real estate loan is like a mortgage on a property. The process is similar to getting a personal mortgage and requiring extensive documentation.

Conventional banks are the primary lenders for commercial loans. They have strict commercial real estate loan requirements, such as a 후순위아파트담보대출 debt service coverage ratio (DSCR) that measures your business’ ability to pay its debts.

Collateral

Commercial real estate loans are different from residential mortgages in that they are used solely to finance income-producing properties through which businesses operate. Because of this, investors must often form a business entity to qualify for these types of loan. They also must be prepared to guarantee the mortgage via a lien, which gives lenders the right to seize the property in case of default or nonpayment.

When deciding to lend funds for a commercial property, lenders look at several factors including the value of the property, creditworthiness of the borrower (or owners), and financial ratios such as debt service coverage ratio. Unlike consumer mortgages, most commercial loans are structured as term loans with a repayment period of up to 5 years. Some are even structured as amortized loans with a longer repayment schedule, which is ideal for long-term investments like building a restaurant or retail outlet.

Investors may also choose to go with hard money loans, which bypass the traditional lender route altogether and are issued by private individuals or companies. These types of loans are more concerned with the value of the property rather than the creditworthiness of the borrower, but they can be quite risky because interest rates tend to be high. To help mitigate risks, investors should carefully review their options and select a lender that offers the terms most suitable to their business growth plans.

Interest Rates

Depending on the type of loan and property, commercial real estate loans have interest rates that vary. This is because of the rigorous underwriting process involved in evaluating business prospects and cash flow to determine whether a commercial loan can be paid off on time.

The best commercial mortgage rates are available to those who meet the minimum credit requirements and qualify as a prime borrower. The most favorable interest rates are offered by banks, followed by online lenders. Typically, borrowers with lower credit scores or less-than-stellar business finances must accept higher interest rates and put down more money to qualify for commercial real estate loans.

For the most favorable terms, choose a commercial loan that is backed by the Small Business Administration (SBA). The SBA 504 and 7A loans provide generous funding and offer loan-to-value ratios of up to 75 percent. They also have flexible terms of up to 25 years.

Commercial loans are considered illiquid assets, meaning they have no organized secondary market like residential mortgages do. As a result, lenders set their commercial loan rates based on several factors, including the 10-year Treasury bond yield, swap spreads and liquidity premiums. Commercial loan terms may run anywhere from 5 to 25 years, with some offering shorter term lengths and extended amortization periods. They may also require a balloon payment at the end.

Requirements

Commercial real estate loans are designed to help small business owners purchase property that is used solely for their own business purposes. They often require that the borrower personally guarantee the loan, meaning that if the property is not producing enough cash flow to cover the monthly payments and the lender needs to liquidate the asset, the owner will be responsible for covering the difference.

The specific requirements for a commercial real estate loan can vary depending on the lender and the type of property. However, most lenders will look at a borrower’s personal and business credit scores and financial history to assess their risk and determine whether or not to provide financing. A down payment of at least 20% of the property’s value is also typically required to qualify for a commercial property loan. Lenders may also consider a debt-service coverage ratio (DSCR), which is calculated by dividing the property’s net operating income (NOI) by its annual mortgage debt service to ensure that there is sufficient cash flow to cover the debt payments each month.

If you’re looking to secure a commercial real estate loan, it is worth checking out multiple different lenders to compare the terms and interest rates available. Online marketplaces like National can connect you with lenders that offer business financing, including commercial property loans, to find the right fit for your needs.

Time to Fund

Unlike consumer mortgages, commercial loans are meant for business owners who want to buy or construct property that will be used to house their own businesses. Credit is advanced in stages (or “progress draws”) based on the project’s milestones and all principal is repaid when the loan matures or upon the sale of the property. These types of commercial real estate loans are available from banks, life insurers, commercial mortgage-backed securities lenders and the Small Business Administration.

Another financing option for commercial properties is a business line of credit, which provides revolving access to capital. This type of credit is similar to a business credit card but usually offers higher funding amounts and better interest rates. Lenders will assess a borrower’s eligibility for business lines of credit on the basis of the individual or business’s financial strength, which includes the use of a personal and/or business credit score. Missed payments or accounts in collections can negatively affect the credit score and therefore limit borrowing options for businesses.

It is important to research lenders before applying for a commercial real estate loan because they vary in their requirements, interest rates and application process. Many online lenders, for example, offer more flexible terms for borrowers with less-than-perfect credit. This allows them to provide funding for commercial real estate projects even when traditional lenders turn down the application.