When it comes to financing a commercial real estate purchase, there are several options available to business owners. One popular choice is a commercial real estate loan, which can provide the funds necessary to buy or refinance a property. However, the process of obtaining a commercial real estate loan can be complex and time-consuming, and it’s important to understand the different types of loans available and the requirements for each. In this article, we will discuss the basics of commercial real estate loans and provide tips on how to navigate the process.
Types of Commercial Real Estate Loans
There are several types of commercial real estate loans available, each with its own set of terms and conditions. The most typical loan types are as follows:
- Conventional Loans: These are the most common type of commercial real estate loan and are typically provided by banks and other financial institutions. Conventional loans are typically used for the purchase or refinance of a property and require a down payment of 20-30%.
- SBA Loans: The Small Business Administration (SBA) provides a variety of loan programs for small businesses, including the SBA 7(a) and SBA 504 loans. These loans are typically used for the purchase or refinance of a property and require a down payment of 10-20%.
- Hard Money Loans: These loans are typically provided by private investors and are based on the value of the property rather than the creditworthiness of the borrower. Hard money loans are typically used for short-term financing and require a down payment of 20-30%.
- Bridge Loans: These loans are designed to provide short-term financing for the purchase or refinance of a property. Bridge loans are typically used when a property is being sold and the proceeds from the sale will be used to pay off the loan.
- CMBS Loans: These loans are backed by a pool of commercial mortgages and are typically provided by large financial institutions. CMBS loans are typically used for the purchase or refinance of a property and require a down payment of 20-30%.
When evaluating the different types of commercial real estate loans, it’s important to consider the terms and conditions of each loan, including the interest rate, loan-to-value ratio, and repayment terms.
Qualifying for a Commercial Real Estate Loan
To qualify for a commercial real estate loan, business owners must meet certain criteria. The most important factors considered by lenders include:
- Creditworthiness: Lenders will review the credit history of the borrower, including their credit score, outstanding debt, and payment history.
- Income: Lenders will review the income of the borrower, including their salary, business income, and rental income from the property.
- Collateral: Lenders will review the collateral offered by the borrower, including the property being purchased or refinanced.
- Experience: Lenders will review the experience of the borrower, including their experience in the real estate industry and their experience managing and operating a business.
- Business plan: Lenders will review the business plan of the borrower, including their plans for the property and their projected income and expenses.
Navigating the Process
Obtaining a commercial real estate loan can be a complex and time-consuming process. To navigate the process, business owners should consider the following tips:
- Hire a commercial real estate broker: A commercial real estate broker can help business owners find the right property and the right lender for their needs. They can also help business owners navigate the process and ensure that all necessary documents are in order.