Capital Max | Your Detailed Guide to Commercial Real Estate Loans for Businesses

Capital Max

Capital Max | Your Detailed Guide to Commercial Real Estate Loans for Businesses

Most businesses struggle to get commercial real estate loans because they don’t understand the purchasing or refinancing processes. Some don’t get funding because they can’t meet the regulatory requirements. Due to the different uncertainties business owners have about commercial real estate business loans, we’ve decided to create a detailed guide.

Overview of Commercial Real Estate Loans

Commercial real estate financing provides business owners or companies with the funding they need to buy and develop commercial real estate. Examples of these commercial real estate are retail malls, office buildings and complexes, hotels, and shopping centers.

However, the financing process for commercial real estate loans are different from that of residential mortgages. Lenders and banks usually look for additional information, like net operating income, before granting a loan.

Loan Types to Choose Based On Business Growth Plans

If it’s your first time getting commercial real estate loans, you should carefully understand the various lending pathways. Here are some of the common ones to choose, depending on the growth plans of your business:

Commercial Mortgages

Commercial mortgages or business mortgages are loans secured on properties that aren’t your residence. They are used for purchasing properties like additional office locations, warehouse spaces, or storefronts.

If you’re not getting a commercial mortgage for business expansion, you may find it useful for the renovation and repair of existing buildings you own.

Choosing the Best Commercial Mortgage

Commercial mortgages are another commercial real estate loans that are generally good for business owners due to their low-interest rates. However, before choosing one, here are some factors you should keep in mind:

  • Bad credit rating: In most cases, you can apply for a commercial mortgage, even with a bad credit rating. But you’ll likely pay a high interest in that case.
  • Affordability: Since deposits for commercial mortgages can be high, ensure the deposit and monthly repayments are within your budget.
  • Loan-to-value ratio: Your loan-to-value ratio is the ratio of the amount you’re borrowing against the property’s market value.

SBA 504 & SBA 7 Loans

SBA loans are government-guaranteed funds offered through national and local banks. Most SBA loans have flexible repayment terms and low-interest rates.

SBA 504 Loans

The SBA 504 loan typically involves two different components – the bank and a Certified Development Company (CDC) for real estate acquisitions or long-term equipment purchases. SBA 504 loans can’t be used for debt refinancing, so they shouldn’t also be used to refinance an existing commercial mortgage.

SBA 7 Loans

An SBA 7 loan is the type of commercial real estate loans that provides significant funding for small businesses for the purchase of new property, renovations, or refinancing of business debt. 

There are different types of SBA 7 loans, each determining the maximum loan amount and application turnaround time. For example, the standard SBA 7(a) loan has a maximum loan amount of $5 million with an application turnaround time of 5 to 10 days.

The maximum maximum loan term for SBA 7(a) loans varies based on the purpose of loan proceeds:

  • 10 years for working capital or inventory loans.
  • 10 years for equipment.
  • 25 years for real estate.

There can be exceptions to the terms of the commercial real estate loans. For instance, SBA CAPLines of credit has a maximum term length of 10 years, and the Builders line of credit can’t exceed a five-year term.

Hard Money Loan

Hard money loans are short-term bridge loans from private companies used primarily in real estate transactions. The terms of credit are based on the value of the property as collateral, in opposition to the creditworthiness of the borrower.

In some cases, hard money lenders can issue loans within 10 business days, while traditional banks take up to 30 to 50 days for funding. However, with the fast funding time of the commercial real estate loans come a higher interest rate of 8% to 15%, which is significantly higher than a mortgage.

Conventional Bank Loan

Conventional bank loans are great if you have a relationship with a local banker. They are not government-backed and typically have stricter requirements.

Most conventional loans are either conforming or non-conforming, depending on whether they are in line with the Federal National Mortgage Corporation (Freddie Mac). Conforming conventional loans adhere to Fannie Mae and Freddie Mac standards, while others don’t follow those standards.

Qualifying for Conventional Bank Loans

To qualify for conventional bank loans, ensure you know where your credit stands. Most credit scores above 620 or higher have a good chance of getting approved for a conforming conventional loan. You should also prepare for a down payment as that increases your chances of qualifying for these loans at a lower interest rate.

After reviewing your credit score to ensure it’s a fit for the bank loan, check your debt-to-income (DTI) ratio. Most lenders prefer DTIs that aren’t greater than 36%. So, before choosing a lender, ensure their requirements are suitable for you in the long run.

Commercial Bridge Loan

A commercial real estate bridge loan is a different version of a hard loan with more risks than an SBA loan. It has a higher interest rate and a relatively short approval-to-funding wait period. To qualify for a bridge loan, you may need a credit score of 650 at the very least.

Bridge loans are great commercial real estate loans option for investors who want to make renovations and begin construction before a more comprehensive refinance. So, if you’re trying to take advantage of a quick opportunity, these types of loans may be a good one for you.

Before choosing a bridge loan, ensure you’re confident in your return on investment. If you’re not, consider other financing options with lower interest rates and ideal terms.

Blanket Loan

Commercial blanket loans are great for borrowers who need multiple properties. These loans streamline your lending process and reduce costs associated with buying multiple properties.

As a borrower, having all of your properties under a loan makes it easier to make payments and set loan terms. If you want to sell a property among the others in the loan, you can develop a built-in release clause to ensure it doesn’t affect other properties in the loan.

Blanket loans aren’t for everyone, especially because all the properties are rolled into one loan. In most cases, they end up being collateral for one another, and if one property doesn’t bring in cash flow, the loan and other properties could be at risk.

With all of the risks that a blanket loan poses, who’s in the best position for these real estate loans? In most cases, blanket loans are good for large organizations that can afford the risk of multiple real estate properties at once.

What are the Requirements to Qualify for a Commercial Real Estate Loans for Businesses?

Similar to getting a personal home mortgage, there are fundamental requirements for commercial real estate loans. Below is a list of the most significant ones:

Experience Level

Before granting you credit, most commercial lenders begin their review by asking how long you’ve been in business. The longer you’ve been running your business, the better. If you’re starting a new business, you can also apply for a commercial real estate business loan, but lenders may have additional requirements.

Personal and Business Credit Scores

Lenders check for your personal and business credit scores to determine your interest rate. Most borrowers with poor credit get high interest rates, while those with good credit have a higher chance of getting low-interest rates.

Bank Statements for Business

Your business bank statement helps the lender know the average cash flow within your business. It gives them a clear picture of the money leaving and coming into your business. Get a bank statement that covers four to six months of transactions.

Personal and Business Tax Returns

Providing your personal and business tax return documents serves as proof of income to the lenders. If your entity type is a pass-through entity, it’s normal not to have a business tax return. Reach out to your lender to find out if you need to provide an alternative document.

Business Plan

Your business plan isn’t always part of the loan application process, but some lenders require this documentation. When drafting your business plan, ensure you include a detailed overview of your products or services, teams, operations, facility plans, marketing plans, and other additional information.

Get Reliable Commercial Real Estate Loans at Capital Max

Now that you understand commercial real estate loans and the different requirements, contact our team at Capital Max if you’d like to apply for this loan and get approval. If you have any questions regarding any of the required processes for securing a loan, you can also reach out to us for help.

At Capital Max, we provide expert and honest assistance in real estate financing. Our creative financing solutions and reliable commercial real estate loans are just what you need to secure your next real estate project.