What Is a Commercial Loan?

Learn what a commercial loan does and why you might want one.

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A real investment can be a great way to grow your business. A new building can help you have space for more employees or more customers. And if you rent out your real estate to other businesses or individuals, it can be a great source of passive income

All of which sounds simple―until, of course, it comes to paying for that real estate investment.
Enter commercial loans―a specific type of loan for all kinds of business real estate purchases (and other transactions too).

In this guide, we’ll give you the lowdown on what commercial loans are, how you can use them, how you can get them, and more. You’ll be ready to buy that commercial real estate in no time.

Commercial loans table of contents

Commercial loans vs. business loans
While the terms commercial loan and business loan sometimes get used interchangeably to talk about any business loan, commercial loans usually refer to commercial real estate loans specifically. Those are what we’re talking about in this article.
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What is a commercial loan?

Commercial loans, or commercial real estate loans, are specific types of business loans used for business real estate financing needs.

There are a variety of types of commercial loans, each with unique uses (and we’ll talk about the specifics more in a minute). So commercial loans can refer to commercial mortgages, commercial bridge loans, SBA loans, and more.

While loan sizes and interest rates vary from lender to lender and loan to loan, commercial loans often come in large amounts with low rates. That makes them ideal for large, expensive real estate purchases.

Partial owner financing

Some business owners use owner financing when they get a traditional loan, but it’s not big enough to cover the entire purchase cost. Partial owner financing can make up the difference.

So how does owner financing work? Well, once a buyer and a seller agree to go with owner financing, they have to come to agreement on the terms and conditions.

Just like a normal commercial mortgage, owner financing will have an amount that’s being financed, interest on that amount, a payment schedule, etc. In most cases, the seller will also require the buyer to make a down payment―again, just like a traditional mortgage.

Once they have that agreement, they make it formal. This takes the form of a promissory note, a document that lays out all those details, and a mortgage or deed of trust, which is essentially a lien on the property being sold.

After that, as with any loan, the buyer makes scheduled payments, and everyone’s happy. Or are they? Because as it turns out, owner financing isn’t right for everyone.

Who offers commercial loans?

You can get commercial loans from both traditional lenders (banks and credit unions) and alternative lenders (online lenders)―whatever floats your boat.

What are commercial loans used for?

As we said, commercial loans are used for business real estate transactions. That might cover more than you think, though.

For example, one of the more common uses of commercial loans is buying buildings. But there are lots of things that fall under that umbrella:

  • Brick-and-mortar storefront for your retail store
  • Office/practice space for your business
  • Warehouse or manufacturing plant
  • Office/practice space you rent out to other businesses
  • Residential buildings you rent out to families and individuals

And you can probably think of more.

Plus, you can use some types of loans to buy undeveloped or partially developed land to build any of the above. You can even use some commercial loans for renovating or flipping existing buildings.

Put simply, commercial loans have a lot of uses.

How do you get a commercial loan?

Applying for a commercial loan is a lot like applying for any other business loan.

Each lender will have its own loan eligibility requirements. But generally, to prove your creditworthiness and qualify for a commercial loan, you’ll need a good credit score, plenty of annual revenue, and a business that’s been around for at least a couple years.

As part of their underwriting process, lenders will want to look at all sorts of financial documents and details about your business, like these:

But it’s not just you that your lender cares about―they consider the property too. So expect your lender to ask for things like appraisals and inspections before agreeing to give you money.

Applying for a commercial loan
For more info on the loan application process, check out our step-by-step guide to getting a commercial real estate loan.

How do commercial loans compare to other business loans?

You probably know that there are lots of other types of business loans out there. So why not use those for your commercial real estate needs?

Commercial loan fees
While both commercial loans and other business loans have fees, the specific fees may be different. Learn what commercial loan fees you should expect in our guide to common loan fees.

Well, commercial loans tend to come in larger loan amounts than other business loans do. It’s not a hard and fast rule. But many real estate loans have maximum loan sizes in the millions of dollars, while many other types of business loans max out in the hundreds of thousands. And depending on what real estate you’re buying, you may need the larger loan size.

Fortunately, commercial loans usually come with longer loan terms, giving you plenty of time to repay that big loan. Other business loans have terms between a few weeks and a few years, but many commercial mortgages give you up to 30 years to repay your loan.

And if you do get a large commercial loan, you’ll be happy to know that commercial loans, as a rule, have lower interest rates than you’d find on other business loans. Commercial real estate loan rates often start in the low single digits, while other business loans usually start at least a couple percentage points higher.

Part of the reason that commercial loans have those lower rates is that they’re usually secured with collateral. The collateral lowers the risk for the lender, and lowers your rate by extension. While some business loans are secured, there are many unsecured business loans out there.

Just because you’re not getting traditional financing doesn’t mean you should skip all the traditional steps. It’s a good idea―for both buyers and sellers―to get a property appraisal during the negotiation process.

Once they have an agreement, all those details need to be drawn up in a promissory note. Again, in most cases, it’s best to have an attorney do this.

While you can do it yourself or with online legal software, an attorney can make sure that you’re obeying all applicable laws and creating a legally sound document that will hold up in court.

You’ll also need to draw up a purchase and sale agreement as well as a mortgage or deed of trust (depending on your state).

When all the documents are ready, you can review and sign them. And then you’re done! Except, of course, for all those mortgage payments. But you get the idea.

Commercial loan collateral
In most cases, the collateral for a commercial real estate loan is the very real estate you’re buying with the loan.

What types of commercial loans can you get?

As we said above, you can find many types of commercial loans. It’s a broad category that includes all sorts of loans with their own specialized uses and conditions.

So let’s break down a handful of the most popular types of commercial loans.

Where to get a commercial real estate loan
We’ve linked to some of our favorite commercial lenders below. For more options, check out our rankings of the best commercial real estate loans.

Commercial mortgages

Commercial mortgages might be the most popular type of commercial real estate loans. You use a commercial mortgage to purchase property. They work a lot like the personal mortgage on a house, except they’re for business real estate needs.

These loans come with nice, low interest rates and long terms―often up to 30 years.

Not all commercial mortgages are the same. Some lenders offer commercial mortgage loans only for owner-occupied real estate (like an office building you intend to use for your business), while others will fund real estate you plan to rent out. So make sure your lender has the right type of commercial mortgage for your real estate needs.

Commercial bridge loans

Unlike commercial mortgages, which offer long repayment terms, commercial bridge loans work best as a short-term borrowing solution. Bridge loans have higher interest rates and shorter terms―generally three years or less.

That’s because bridge loans are a way to quickly secure financing for the short term, usually with the intention of paying off the loan or refinancing it (often with a commercial mortgage) ASAP.

Commercial bridge loans vs. hard money loans
Bridge loans are sometimes called hard money loans, but they’re not always the same thing. The key difference? Hard money loans usually come from private lenders, while bridge loans usually come from established business lenders.

So if you can’t get a mortgage on the townhomes you plan to renovate (thanks to their inhabitable condition), you might get a commercial bridge loan in the short term. Once you’ve renovated and rented out the units, you can refinance with a different commercial loan―hopefully one with a longer term and lower interest rates.

SBA 7(a) loan

SBA 7(a) loans come backed by the U.S. Small Business Administration (SBA), though they’re actually funded by lenders. Thanks to that government backing, these loans have very low rates and very long terms.

SBA 7(a) loans have many uses, but larger loan sizes (over $500,000) are specifically for real estate financing. You can use your 7(a) loan to either purchase real estate or refinance an existing commercial real estate loan.

Note the 7(a) loans apply only to owner-occupied commercial real estate. You don’t have to occupy the whole property, but you do need to occupy at least 51% if you want to use a 7(a) loan to purchase or refinance real estate.

SBA 504 loan

SBA 504 loans are another type of SBA-backed loan. Unlike 7(a) loans, SBA 504 loans get funded partially by a lender and partially by Certified Development Companies (CDCs).

You’ll still get the low loan interest rates and long repayment terms you’d expect from any SBA term. Smaller 504 loans can be used for equipment financing, but larger 504 loans are specifically for commercial real estate purchases.

There’s a catch, though: SBA 504 loans are designed specifically for job creation. So your commercial real estate purchase has to lead to new jobs―at least one for every $65,000 you borrow from the loan program.

Other types of commercial loans
If you want more detail and more loan options, you can check out our comprehensive guide to the types of commercial loans.
Don’t qualify for a business loan? Get a personal loan instead.

Enter your loan needs and qualifications to get matched with a list of lenders best suited to you. Then, sort by the financing factor that you find most important. (Note: not all lenders allow personal loans for business use.)

The takeaway

Commercial loans provide a way for businesses like yours to purchase, renovate, and refinance real estate. Their large amounts, low rates, and longer terms make them ideal for just such uses.

Just remember that different commercial loans have different purposes. So find the type that’s right for you―and then go get that real estate!

Before you take out a commercial real estate loan, make sure you understand the costs with our commercial loan calculator.

Related reading

Commercial loans FAQ

A regular loan (depending on whether it's a business loan or personal loan) from a bank or lender helps you finance your business or some sort of personal need (an emergency fund for example). Commercial real estate loans, however, lend a sum of money to business owners to invest in a property.

There are many benefits—longer loan terms, larger loan amounts, and lower interest rates to name a few. Read more about this in our comparing commercial loans to other business loans section.

Commercial loans currently range between 3% to 20%— depending on the loan product. Read more about this in our commercial real estate loan rates article.


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Chloe Goodshore
Written by
Chloe Goodshore
Chloe covers business financing and loans for Business.org. She has worked with many small businesses over the past 10 years, from video game stores to law firms. Those years watching frustrated business owners try to sift through their many options gave her a passion for breaking down complex business topics. She wants to help business owners spend less time agonizing over their businesses so they can spend more time running them.
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