Types of Commercial Loans for Real Estate and BeyondYou’ve found the right property, but how do you find the right loan to buy it? We’ll guide you through the maze of commercial real estate loans.
The loans max out at $10 million and can be used at the discretion of the business. The loan can be forgiven, however, if certain requirements are met. If no employee is compensated above $100,000 and at least 75% of the money goes to paying workers, the entire loan may be forgiven.
Loans that are not forgiven must be repaid in two years at a 0.5% interest rate after six months of interest deferment.
The only way to apply for these loans is through an SBA authorized lender. Applications open on Friday, April 3, and close on June 30. The application consists of a two-page form in addition to required documentation.
To see if you qualify, apply at a Paycheck Protection Program authorized lender.
Even if you’re able to make money from a property, not every piece of real estate qualifies as “commercial.” Also, a real estate bridge loan isn’t specifically for the construction of a chasm-spanning road extension—but an actual, physical bridge could be figured into a construction loan. And blanket loans? They’re not really all that warm.
And the convolutions don’t end at that: there are almost as many varieties of commercial real estate loans as there are categories of commercial real estate. As such, there’s plenty of room for confusion.
Let Business.org walk you through the various types of commercial real estate loans available in the marketplace, as well as what does (and doesn’t) qualify as profitable property to a bank or lender.
The terms commercial loan and commercial real estate loan tend to get thrown around interchangeably. We’ll focus on the latter—loans for physical property—but if you’re more interested in other types of commercial loans, we’ll cover that below too.
Types of commercial loans
Real estate loans aren’t one-size-fits-all. The various types have very different terms, rates, and uses. We’ll point out which loans work best for what so you can find the right one for your real estate project.
Long-term fixed-interest commercial mortgage
A standard commercial real estate loan from a bank or lender works similarly to a home mortgage but with broader uses and shorter terms. Instead of a 30-year repayment schedule, real estate loans rarely exceed 20 years, falling mostly in the 5- to 10-year range. They also require a personal FICO credit score of 700 or above, at least one year in business, and a minimum of 51% occupancy of the commercial property by the owner’s business.
Starting interest rates on commercial real estate mortgages fall typically between 4% and 7% with variable (the interest rate could go up or down depending on market trends, affecting your monthly payment). With a fixed rate mortgage, the interest and payment remain static.
Don’t qualify for a business loan? Get a personal loan instead.
Interest-only payment loan
Also known as balloon loans, interest-only payment loans are geared toward businesses expecting a large payout at a future date, rather than a steady monthly money stream at the outset. Payments are made only on the smaller interest amount, with a full “balloon” payment due at the end of the term, which is relatively short (between three and seven years).
Business owners tend to use interest-only loans to build up—or literally build, as in construct—a commercial property with the intention of refinancing the end-term lump sum later.
As with a home mortgage, business owners like to take advantage of available lower interest rates through commercial real estate refinancing loans. There are additional fees and costs involved when refinancing, but they’re usually minimal compared to overall savings through lower monthly payments and less cumulative debt (via a blanket loan; more on that later).
As a result, refinancing can also boost profit flow through improvement or expansion of commercial properties, as well as help pay off looming expenses, like the final payment on an interest-only loan.
Hard money loan
Unlike most other types of financing, hard money loans come exclusively from private investors who are willing to take lending risks based on the value of the commercial property itself, not the credit rating of the borrower. While most types of commercial lending are long-term loans that give you years to repay, hard money loans count as short-term financing. They have brief loan terms of just 6 to 24 months. That urgency means that hard money loans carry interest rates as high as 10% to 18%, in addition to costlier up-front fees.
“Fix and flip” property investors like hard money loans, though you’ll rarely hear them referenced on HGTV.
A commercial real estate bridge loan is a softer version of a hard loan with lower interest rates (6.5% to 9%), longer terms (up to three years), and a short approval-to-funding wait (15 to 45 days). Business owners need a credit score of at least 650 to qualify for a bridge loan from a traditional bank, and they must be able to cover a 10% to 20% down payment.
Short-term investors prefer to use bridge loans for renovations and construction before a bigger, more comprehensive refinance.
Construction loans are taken out to cover the material and labor costs of building structures like offices, retail fronts, industrial facilities, multi-family rental units, and more. If the undeveloped land has already been purchased, it can be utilized as collateral for the construction loan (as can the building materials).
Construction loan terms range between 18 and 36 months, usually leading into a long-term mortgage.
Under a commercial real estate blanket loan, businesses can fold multiple properties into one financing arrangement for convenience and flexibility. If you have 10 properties covered by a blanket loan and decide to sell two, you can do so without incurring penalties, then use the profits from that sale to invest elsewhere.
While the reduction in paperwork and increase in investment options are attractive, blanket loans have downsides: they’re complex mortgages that are difficult to get, with large payments and even larger potential default penalties.
Types of commercial real estate
Commercial real estate encompasses any building, structure, or piece of land that can be used to generate income. In most cases, buildings with 51% occupancy by the owner’s business qualify for loans more quickly and easily, as banks recognize that the business is more invested in the property. Here are some of the types of commercial real estate.
Apartments, as well as townhomes and condominiums, are classified as commercial real estate only if they have five or more living units. Residential properties of four or fewer units aren’t considered commercial; they can be purchased with a personal loan.
Offices located in urban business districts are typically the most sought-after properties—and the most expensive. Prices come down the further away you get from a commercial business district, and some startups prefer to forgo the pricier “prestige” of a downtown office.
Stand-alone shops selling goods fall under the category of retail buildings, as do larger properties like strip malls (a structure holding several small businesses and usually a large anchor retailer) and regional malls (massive buildings with multiple stores and several anchors).
Medical facilities include hospitals (24-hour care with large staffs), ambulatory surgical centers (specializing in complex procedures), doctor’s offices (smaller-staffed primary care outlets), urgent care clinics (walk-ins), and nursing homes (long-term care accommodations).
Warehouses and industrial facilities
Usually located outside of cities and easy to access for product and material transport, warehouses and industrial facilities can be used for heavy manufacturing and light assembly, as well as small and bulk storage of goods, or any combination of these options.
Hotels and resorts
This is a broad category that can include full-service hotels, limited-amenities motels, extended-stay facilities, luxury resorts, gambling casinos, corporate chains, and independent inns. It’s not the best route for beginners, as hotels and resorts involve extensive paperwork and regulation.
Commercial real estate developers refer to land development—turning raw acreage into a viable space for future construction—as “taking it to the map.” If done right, land development has the potential for significant financial return for relatively little up-front investment.
Other types of commercial loans
Commercial real estate loans aren’t the only types of commercial loans out there. You can also get business loans like these.
A term loan—a borrowed lump sum of money from a bank or lender that’s paid back over an agreed-upon span of time—is the most basic of business loans. Whether long-term (up to, and sometimes above, 20 years) or short-term (as brief as three years), borrowers repay lenders through monthly installments over a preset schedule. Traditional bank term loans can be difficult to qualify for if your credit isn’t pristine; online lenders and marketplaces tend to be more lenient.
Business lines of credit
A business line of credit works like a credit card, where you draw available money as needed at will. As long as the credit line isn’t maxed out, you’ll have revolving capital at the ready for equipment purchases, investment opportunities, or unforeseen emergencies, all without having to go through an additional loan process. Lines of credit are good for seasonal businesses with fluctuating cash flow needs.
Government business loans
Sometimes the US government can step in to help out a small business—it even has a division called the Small Business Administration. SBA loans come in a wide variety, most with lower interest rates than banks and lenders would dare offer on their own (the SBA doesn’t make loans; it works with banks and guarantees payback).
If you need equipment for your business—whether that’s a fancy new drill press, a used embroidery machine, or even pricey software for your office—then an equipment loan might be a good fit. With equipment loans, the equipment you buy serves as collateral for your loan. That means that you can sometimes get better rates for equipment loans than you would qualify for with other types of loans.
Are you the kind of business that sends invoices to clients? Then you probably qualify for invoice financing loans. To get these, you sell unpaid invoices to a lender; they then give you a big percentage of that invoice (between 70% and 90% is common) up front. After the customer pays the invoice, you get the remaining percentage—minus fees. Invoice financing is a great way to improve cash flow while waiting on clients to pay.
No matter the kind of commercial real estate venture you’re looking to get into, there’s a loan for it. Thanks to the rise of online lenders and marketplaces, there are now more customizable options and avenues for acquiring capital than ever before. Another factor to consider: since owner-occupied commercial real estate is essentially its own collateral, interest rates for commercial real estate loans are generally lower than those of other business loans, making them a smart place for a small-business owner to start.
Ready to get a commercial real estate loan? Use our commercial loan calculator to calculate what you’ll end up paying!