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What Kinds of Loans Are Available for Commercial Properties?

crop farmer showing money in green summer field in countryside

Commercial real estate loans are helpful resources for businesses looking to purchase or renovate properties. A technology company might want to buy a new office building, for example, or a restaurant owner might want to put in a new kitchen.

Just as home buyers often get a mortgage for new residences, business owners can finance their next properties through commercial real estate lending. The big difference here is that commercial real estate loans are largely provided to businesses, such as corporations and trusts, instead of individuals.

There are also various types of commercial real estate loans and lenders. It’s important for business owners to understand the different options available to them so they can make the best choices for their business needs and financial goals.

Permanent loans

A permanent loan is a traditional commercial mortgage, similar to a residential mortgage. These traditional loans commonly have repayment schedules of five to 20 years with fixed or variable interest rates. Amortization periods can run even longer, such as up to 30 years.

Many traditional commercial lenders will offer permanent loans to businesses, provided they meet certain criteria. For example, they may want to see a loan-to-value (LTV) ratio of 65-80%. The LTV is the amount of the loan divided by the property’s value. They may also want to see a high debt service coverage ratio (DSCR), which is the commercial property’s annual net operating income divided by its annual debt payments.

SBA 7(a) loans

The U.S. Small Business Administration (SBA) offers 7(a) loans of up to $5 million for businesses looking to purchase, build, or renovate commercial properties. Businesses may have flexibility in how they use their funds, but the SBA stipulates that the property must be owner-occupied.

Business owners can apply for SBA 7(a) loans through affiliated commercial lenders. Interest rates can be fixed or variable, and repayment and amortization periods can reach up to 25 years. These loans require a minimum down payment of 10%, though individual lenders may have a higher threshold.

SBA 504 loans

The SBA also offers 504 loans for $25,000 to $10 million or more. Each 504 loan is covered by two different lenders:

  • A nonprofit Certified Development Company (CDC), covering 40% of the loan
  • A third-party lender, covering 50% or more of the loan

As with SBA 7(a) loans, businesses are required to provide a minimum down payment of 10% and repay their loans with a maximum term of 25 years. The interest rate on the CDC loan is fixed while the interest rate on the third-party loan can be fixed or variable.

Bridge loans

Bridge loans are short-term loans that businesses can use to start funding their commercial properties while they wait to secure long-term loans or refinancing. For example, a business owner might use a bridge loan to quickly bid on a popular commercial property. Once they close on the property, they can refinance to a longer-term loan. Or a real estate investor might use a bridge loan to flip a property and make a profit. 

Bridge loans commonly have repayment periods of six months to three years, and they come with higher interest rates than traditional loans. While businesses may be able to secure bridge loans from alternative lenders, they will still likely need a strong credit history and a down payment of 10-20%.

Hard and soft money loans

Hard money loans are similar to bridge loans in that they have short repayment terms and high-interest rates. The biggest difference is that hard money loans are exclusively offered by private lenders. Hard money loans are helpful for businesses that want a quicker alternative to traditional loans but still want to go through a commercial bank or investor.

Soft money loans are similar to hard money loans, but their approval process places greater emphasis on credit history than the property value. If a business owner has a high credit score, for example, they may be able to get a soft money loan with a quick repayment period but a low-interest rate. Soft money loans are helpful for businesses with strong creditworthiness that want to close quickly.

Source: iQuanti, Inc.

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