real estate business loan
Credit: iStock

Commercial real estate loans are money borrowed for the purpose of buying or improving real estate. You can use them to buy a new building, spruce up the one you already have, or even build a 100-foot neon Belgian waffle to lure people from the stars. The current average interest rate for a commercial real estate loan is between 4% and 6%, making this a great time to take out a loan. But before you submit your application, it’s a good idea to familiarize yourself with the various real estate business loan options and what to anticipate from each.

Real Estate Business Loan

A sort of financing used to purchase real estate for commercial usage is a commercial real estate loan. To be eligible for a commercial loan, you must have excellent credit, put down 25% or more, and intend to use most of the financed property for your business.

What Will You Need a Commercial Real Estate Loan For?

Although most people believe that loans for commercial real estate are only used to purchase commercial property, these loans actually have other, more specialized purposes. Commercial real estate loans are designed to assist you in financing the purchase or remodeling of real estate for your own business’s use. To be eligible for a commercial loan, your company must use the majority of the assets supplied as security for the loan.

As a result, even while you are still permitted to lease some of the underlying land, your company must still use at least 51% of it. However, because this is considered a more speculative operation, if you wanted to lease out 50% or more of a space, you would need different funding.

Choosing a Commercial Real Estate Loan

When applying for a commercial real estate loan, it’s important to choose a lender who not only offers the loan type you want, but also has rates you can afford and qualification requirements you can meet. This is a result of the variety of loans and lenders offered.

Consider the following aspects while selecting a loan:

  • Convenient loan goods
  • Starting expenses
  • Starting interest rates
  • A requirement for documentation
  • Time-in-business requirements
  • Early payment fees and penalties
  • Personal-guarantee requirements
  • Fast-funding or bad-credit options 
  • Better Business Bureau ratings and customer complaints

Commercial Real Estate Loan Requirements

Loan approval for a commercial property differs greatly from loan approval for a residential property. Because you will be utilizing the property for commercial purposes and paying back the loan with revenue from your business, lenders want to make confident that your company can afford the loan instalments.

To be eligible for a loan, you must fulfill the three types of qualifications listed below:

1. Security

Before authorizing a loan, your lender will want to make sure that the asset you are borrowing against is sufficiently secured. This demonstrates that you frequently need to have between 25% and 30% equity on the home you wish to buy in order to qualify. Your lender will also determine how much property insurance you have to protect against property damage (their collateral). The lender will also check the deed and the property’s title to make sure there are no unpaid liens or other claims lodged against it.

2. Income

When evaluating your application, lenders want to see that you make a lot of money compared to your expenses so they can be certain you can afford your loan payments each month. One aspect lenders consider while making this decision is your debt-service coverage ratio (DSCR). The minimal DSCR varies depending on the asset you are borrowing against, however, most lenders demand a DSCR of 1.25 or higher.

3. Credit

If you’re requesting a loan to purchase real estate for your business, your lender will definitely want to check your company’s credit score. Lenders will normally verify your personal credit since they need a personal guarantee from you. Depending on the lender, the minimum credit scores for the majority of conventional loans range from 660 to 680.

To assess your credit risk, lenders will run a credit check on you and ask about your job history. To qualify for a commercial loan, you typically need to have been in business for one or two years. This will allow the lender to have confidence in your company’s revenue, which will be the primary method of loan repayment.

Real Estate Business Loan Rates

Interest rates on loans for commercial real estate generally range from 0.5 to 1 percentage points higher than those on 30-year prime mortgages. Commercial loans typically have shorter payback terms than residential loans, ranging from 5 to 25 years, and are considered as having a higher risk by lenders because commercial real estate is typically harder to sell after failure than residential real estate.

You will be charged interest by the lender for the capital they provide. The total loan amount, the length of the loan’s repayment period, and the base rate—which is either the international LIBOR (London Interbank Offered Rate, measured monthly and measured at 2.28% as of November 2018) or the US Prime Rate (5.25% as of November 2018)—are taken into account when determining the interest rate. Whether the percentage fluctuates with the base rate during the length of the loan’s payback period depends on whether the interest rate is fixed or variable.

The value of assets that generate income is determined by the loan-to-value (LTV) ratio, which is determined by dividing the entire loan amount by the appraised property value or the purchase price. The loan-to-value (LTV) in this case would be 80% ($80,000 x $100,000 = 0.8 or 80%) for a loan on a $100,000 property.

Here are some real estate business loan rates:

1. SBA 7(a) Loan

The Small Business Administration’s (SBA) most well-known funding option is the 7(a) loan program. A 7(a) loan can be acquired more quickly and easily than other SBA loan categories. Because of the SBA guarantee, SBA loan rates are frequently lower than those of commercial banks and online lenders. Funding of up to $5 million is provided for a maximum of 25 years. Another benefit over a typical bank loan is the opportunity to have an LTV ratio of up to 90%, which lowers the required down payment.

2. SBA 504 Loan

A combination loan is an SBA 504 loan. A lender provides one, and a CDC, a type of nonprofit lender, provides the other. Both loans are paid off at once. Because they offer up to $14 million in funding for up to 25 years, SBA 504 loans are excellent alternatives. SBA 504 loans and SBA 7(a) loans both allow loan-to-value ratios of up to 90%, which reduces the required down payment compared to conventional loans.

3. Conventional Bank Loan

The majority of lenders for loans on commercial real estate are banks. They typically deal with customers that have solid credit histories and are searching for finance for small to medium-sized projects. The majority of institutions prefer a credit score of 660 or higher.

Comparable to those for SBA loans are the interest rates that banks charge. Variable-rate loans, with interest rates that change every one to five years, are typically given to applicants. Commercial bank loans will have higher initial costs than SBA loans because of shorter durations and a larger required down payment. A larger range of properties can be funded because the property does not have to be owner-occupied.

4. Hard Money Loan

Businesses that cannot obtain mortgage financing from other regular lenders because of credit concerns or properties in poor condition can use hard money loans. Due to their higher interest rates and costs, these loans are only used as a last alternative when financing a home purchase. Hard money lenders offer quicker funding periods whereas regular lenders typically offer better rates for longer times.Numerous commercial real estate projects, including  mixed-use loans and self-storage financing, can be financed with hard money loans.

5. Online Marketplace Loan

Online marketplaces, which are more modern sources of funding, may be used to communicate between investors and borrowers looking to finance the purchase of commercial real estate. Because they charge more than banks but less than other hard money lenders, these are commonly referred to as “soft-money lenders.” The interest rate varies from 8% to 12%.

What Does Cre Mean in Banking?

The majority of the loans in many banks’ loan portfolios are for commercial real estate (CRE). A growing number of banks have CRE concentrations that are high by historical norms and rising, reflecting the recent very strong demand for CRE lending, a traditional core activity for many community banks.

What Does OCC Mean in Real Estate?

In order to ensure that these institutions are trustworthy, competitive, and able to meet customers’ banking needs, the Office of the Comptroller of the Currency (OCC) oversees a network of national banks and federal savings associations that engage in commercial real estate and construction lending

What Is Real Estate Credit?

Debt is fundamentally what real estate credit is. Debt investors in real estate are either directly or indirectly lending money to someone else who is making an equity investment

What Does Oreo Mean in Real Estate?

National Banks may hold Other Real Estate Owned (OREO) for Specified Periods in Specific Circumstances.

What Does Tft Mean in Real Estate?

TFT stands for “Transaction Fell Through” when the purchasers are unable to finish the transaction for whatever reason. This is occasionally followed by the phrase “At no fault of the property.” This suggests that there was no issue with the house.

What Is Bom in Real Estate?

BOM stands for “Back on the Market,” which refers to a house that was previously under contract to be sold. In contrast to a case where the home’s inspection revealed problems, “no fault of the house” may refer to a scenario in which the buyer lost interest in the property following a protracted short sale procedure or was unable to obtain final financing approval.

What Is Tsi in Real Estate?

The true strength index (TSI) is generally used to spot divergence, pinpoint overbought and oversold conditions in the price of an asset, determine the direction and changes in a trend via the centerline, and highlight short-term price momentum using signal line crosses.

What Does Dt Mean in Real Estate?

A deed of trust, sometimes known as a trust deed, is a legal document used in real estate in the United States to create a security interest in real property. It transfers legal title to a trustee, who retains it as security for a loan (debt) between a borrower and lender.


The typical commercial real estate investor is a company that buys a building, leases out space in it, and then profits from the tenants’ rent payments. The goal of the purchase is financial gain.

Collateral, creditworthiness of the entity (or principals/owners), including three to five years of financial statements and income tax returns, and financial ratios like the loan-to-value ratio and the debt-service coverage ratio are all taken into account by lenders when deciding hether or not to make a commercial real estate loan.

Real Estate Business Loan: References

Leave a Reply

Your email address will not be published. Required fields are marked *

You May Also Like