Whether you’re founding a new startup or you’re looking to expand, there may come a time as a business owner when you want to buy or update a commercial property. A commercial real estate loan could be a great solution to help you accomplish those goals.
Commercial real estate loans can help you secure the funds your business needs to buy commercial buildings, warehouses, undeveloped land, and even apartment complexes. These loans can also pay for updates and renovations to existing property that your business owns.
Types of Real Estate Loans and Their Requirements
Below are six types of commercial real estate loans. You’ll also discover a basic overview of the qualification requirements your business may need to satisfy to qualify with each loan option.
SBA 7(a) Loan Requirements
An SBA 7(a) loan is a business loan that’s backed by the federal government — aka the U.S. Small Business Administration. The partial guarantee that the Small Business Administration provides empowers lenders to extend financing to those who might not otherwise qualify.
Another perk you’ll encounter with these government-backed loans is the interest rate. Interest rates can be competitive with SBA 7(a) loans, potentially reducing your monthly payment size and overall loan cost.
A business owner may be able to borrow up to $5 million with this loan program. For real estate loans, in particular, the repayment period can stretch for up to 25 years.
You can use the funds from an SBA 7(a) loan for a variety of purposes, including:
- Real Estate Purchases (Owner Occupied Buildings or Undeveloped Land)
- Refinance of Existing Commercial Mortgage
- New Construction
- Renovations and Expansions
This type of small business loan can also be used to help your business secure working capital, inventory, and more.
Since SBA loans are available from many different lenders, specific loan criteria can differ from one organization to the next. In general, you and your business may need to satisfy the following loan requirements to qualify for this type of commercial real estate financing.
- Must be a for-profit business in the United States (or its possessions).
- Can satisfy SBA’s definition of a small business.
- Can provide all required documentation (e.g., business and personal tax returns, profit and loss statements, projected financial statements, list of owners and affiliates, business license, business lease, etc.).
- Cannot be delinquent on other government debts (including federal student loans or federal taxes).
- Can demonstrate an acceptable need for the loan.
- All owners with 20% or more ownership in the company must meet SBA character requirements (including a criminal history search).
- Cannot qualify for similar credit with another lender.
- May need a personal FICO Score of at least 640 (often higher) depending on the lender.
- Must have a sufficient down payment (often 10% or higher).
SBA 504 Loan Requirements
Does your business need funding to buy or rehabilitate commercial property? If so, an SBA 504 loan is a solid financing option worth considering.
An eligible borrower might qualify for a loan amount as high as $5 million. The funds could be available through a combination of an SBA lender (50%) and Certified Development Company (40%). Repayment terms on SBA 504 loans can be as long as 25 years.
Depending on the lender and Certified Development Company (or CDC) you apply with, your business may need to satisfy the following requirements when you apply for an SBA 504 loan:
- Must be a for-profit business in the United States (or its possessions).
- Can satisfy SBA’s definition of a small business.
- Can provide all required documentation (e.g., business and personal tax returns, profit and loss statements, projected financial statements, list of owners and affiliates, business license, business lease, feasible business plan, etc.).
- Cannot be delinquent on other government debts (federal student loans, federal taxes, etc.).
- All business owners must demonstrate good character according to SBA standards.
- Must prove a two-year history with an average net income of less than $5 million (after federal income taxes).
- Your net worth (tangible) must be less than $15 million.
Permanent Loan Requirements
A permanent loan is a bit like a conventional loan, but for commercial real estate. Banks, credit unions, and sometimes, life insurance companies offer this type of commercial loan to eligible business borrowers.
Like residential mortgages, permanent loans feature amortization schedules. Amortization schedules will impact how much interest you’ll pay (and when you’ll pay it).
It’s worth noting that these commercial mortgages probably aren’t a good choice if you’re looking for short-term financing. The repayment schedule on a permanent loan typically lasts for a minimum of five years, and often as long as 25 years in total.
Permanent loans can feature lower interest rates and longer repayment periods. As a result, lenders may not be comfortable taking on a lot of risk with these deals.
You need to be a well-qualified applicant if you hope to qualify for a permanent loan with attractive terms (e.g., low-interest rate, low fees, etc.). Good credit is important, as is a solid financial track record and proof of your ability to repay as promised.
Below are some common requirements you may need to satisfy to qualify for a permanent real estate loan.
- The Loan to Value Ratio (LTV) may need to be 75% to 80% or less (based on the National Association of Realtor’s Commercial Lending Report).
- Depending on the lender and LTV, you may need to supply up to 25% in the form of a down payment.
- Your business may need to be in operation for at least two years before applying.
- A commercial lender may want to see a minimum amount of annual revenue (often $250,000 or more).
- You’ll need to meet the lender’s minimum credit requirements — perhaps both with your individual credit scores and your business credit scores.
- Businesses must provide all required documentation including financial statements, tax records, and more.
Hard Money Loan Requirements
Business borrowers that may have trouble qualifying for a permanent loan or an SBA loan may consider hard money loans for real estate purchases. Hard money lenders don’t have the same strict qualification criteria that banks and other lenders often require.
Hard money loans may also be attractive to borrowers who need funds quickly for a commercial real estate transaction. In some cases, you may be able to access funding within less than two weeks with this financing option.
Of course, the perks above come with a big tradeoff that you’ll want to consider. These easier-to-get loans can be a lot more expensive — both in the form of the interest and fees you’ll have to pay to secure financing.
Instead of focusing on credit and financials, a hard money loan from a private lender is based on the value of the real estate asset. Private lenders don’t follow the same guidelines that apply to traditional lenders, but the loan still has to make good sense as an investment.
Below are some examples of the loan criteria a private lender might require for a hard money loan:
- The loan-to-value ratio is usually the most important factor with hard money loans.
- LTV maximums may range from 50% to 80%, depending on the lender and your situation.
- They’ll want to see that you’re an experienced real estate investor.
- Depending on the lender, you may not face a minimum credit score requirement.
- Documentation requirements tend to be less burdensome with hard money lenders.
Bridge Loan Requirements
A bridge loan, also known as a gap loan, is a type of hard money real estate loan available from traditional financial institutions (e.g., banks, credit unions, etc.) or private lenders. It aims to “bridge the gap” until the borrower can either sell the property or secure a long-term loan.
These short-term loans may appeal to buyers struggling to qualify for a traditional commercial property loan. Loan terms on bridge loans often extend between a few months to up to three years. When the term ends, you’ll need to pay off the debt or refinance into a new loan.
Commercial bridge loans can be expensive. Interest rates could be as much as four times higher than an SBA loan or commercial bank loan. But you may be able to access funding within a few weeks and qualify with credit problems, cash flow challenges, and more.
Depending on the lender you work with, here are some common qualifications you may need to meet to secure a commercial bridge loan for your real estate purchase.
- Collateral is key with bridge loans, either on the property you’re purchasing or on the property you’re putting up to secure financing.
- Credit requirements can be lenient, but different lenders may still impose a minimum credit score threshold that you’ll need to meet.
- LTV requirements may range from 80% to 90%.
Blanket Loan Requirements
Commercial real estate investors who own multiple properties can consider taking advantage of blanket loans in certain situations. Blanket loans allow you to consolidate multiple loans into one large loan that covers several properties.
Interest rates can sometimes be lower with this type of financing, and repayment terms may be as lengthy as 30 years. However, there are some significant risks to be aware of with this type of commercial real estate consolidation loan.
With a blanket loan, you tie up several properties under a single financing umbrella. This can make it more difficult to sell off a single property from the group if you wish to do so in the future unless you get a loan with a release clause.
Furthermore, if you run into financial trouble and cannot afford to make your loan payment, you could lose several commercial properties at once.
Your commercial lender can let you know the exact loan criteria you need to satisfy to take out a blanket loan. In the meantime, here are some common requirements you might face:
- LTV requirements may range between 50% to 75%, sometimes higher, depending on factors like creditworthiness and financial strength.
- Cash reserves of up to six months worth of loan payments may be required.
Bottom Line
Commercial real estate has the potential to be a good investment for your business. But the financing you use to purchase property can have a big impact on its overall cost, and whether the investment is sustainable over the long term.
Good credit can be a valuable asset when your business needs to qualify for a commercial loan — real estate or otherwise. As a result, taking the time to establish business credit can be a wise use of your time and energy.
If you’re just getting started, a business credit builder account might be beneficial to your credit-building efforts. A business credit card may be worth considering as well. You can also find helpful tips on how to build business credit in 11 easy steps in this CreditStrong guide.
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