5 Most Common Types of Commercial Real Estate Loans | SMB Compass
Ezra Cabrera | July 13, 2019
Commercial real estate pertains to the type of property used for business purposes, such as a brick and mortar store, office spaces, shopping malls, or manufacturing facilities. Land or mixed-use properties like an apartment building are also considered as commercial real estate, so if you’re looking to purchase or renovate commercial properties, you might want to consider applying for commercial real estate loans.
Buying real estate for your business can be an exciting one because it can mean one thing: you’re expanding! But the experience can easily turn into a nightmare. Since you’ll be taking out a real estate loan for that, which by the way, can be another big decision, you have to know all that there is about it. This includes knowing the different commercial real estate loans.
5 Types of Commercial Real Estate Loans
Much like small business loans, there are different forms of commercial real estate loans. They can come with varying terms, requirements, rates, fees, which are usually based on the loan amount. With that said, here are five of the most common types of commercial real estate loans.
1. Traditional Commercial Real Estate Loans
According to Buttonwood Property Management, A traditional commercial real estate loan is usually a borrower’s first option when they need to secure funds to purchase commercial real estate. Banks typically provide these kinds of high-end loans at a lower rate of interest. However, it’s hard to qualify for one because banks require a high credit rating and a minimum number of years in business.
When applying, banks may ask you to submit your company’s tax documents, financial statement, balance sheets, and business plan. For young businesses, they might not be able to supply these documents as they would need to submit 5 years-worth of records.
2. SBA 7(a) Loans for Commercial Real Estate
The SBA 7(a) loan is the most popular type of loans backed up by the SBA, because of its flexibility. It’s commonly used for working capital, but it can be used to purchase real estate, as well. Business owners can also use it to purchase or refinance commercial properties up to $5 million.
One of the requirements for an SBA loan is a cash deposit of 10% of the planned amount to borrow. Aside from that, the business must have a credit score of 680 or higher and must be in the business for at least 3 years. The loan can be repaid over 10 to 25 years, depending on the amount.
Related: 5 Most Common Uses of SBA 7(a) Loans
3. CDC/SBA 504 Loan for Commercial Real Estate
The 504 loan is another type of loan backed by the Small Business Administration. Unlike 7(a) loans, you can only use SBA 504 loans to purchase equipment and real estate (land and existing buildings). If you’re interested in applying for a 504 loan, keep in mind that applicants have to pay 10% to 15% of the total cost out of pocket.
The repayment period for 504 loans typically lasts as long as 20 years for real estate and 10 years for equipment. The owner must also occupy at least 51% of the property they’re planning to finance.
4. Commercial Bridge Loans
Commercial bridge loans are a short-term financing solution that enables you to buy property to seize upon business opportunities. Once the loan reaches maturity, you can either pay off the total amount of the loan or refinance it into a long-term one. Ideally, bridge loans allow you to address current obligations by providing immediate cash flow. Keep in mind that these loans often have high-interest rates and you have to pledge collateral (like real estate or inventory) to secure it.
Bridge loans are usually used for renovations and construction. They sometimes act as a bridge to a bigger financing option.
5. Hard Money Loans
A hard money commercial real estate loan is a type of short-term loan provided by private lenders and investors. Unlike banks, hard money lenders lend smaller loan amounts at higher interest rates. The upside is that it’s easier to qualify for hard money loans than bank loans. For this reason, many small businesses and start-up companies obtain their commercial real estate loans via hard money lenders.
This type of loan is usually used in high-risk situations, thus, the high-interest rates. While traditional bank loans take 60 days to get approved, hard money loans can provide funds within a week.
Not Sure Which Type of Commercial Real Estate Loans is Best for You?
Commercial Real Estate Loans come in different forms. It’s either used for investments, development, or business. Nevertheless, if you’re planning to apply for one, it’s best to determine which will suit your business best. Consider the things discussed above and talk it over with your trusted financial expert.