Learn About Your Financing Options

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If you're like most people, you'll need to get some financing help to be able to purchase the property.

What type of banks, credit unions or other home mortgage company could you use? What kind of credit do you have and what kind of interest rate could they give you? Answering those questions is the first part of the financing process.

Commercial Real Estate Financing Options

Here we cover four main types of commercial real estate financing – conventional commercial real estate loans, commercial hard money loans, SBA loans and bridge loans.

Each type of financing has positives and negatives, as well as specific applications for which it is most appropriate.

Conventional Loans

Conventional commercial real estate loans bear the most similarity to residential mortgage loans.  They offer the longest terms of any type of commercial real estate financing, typically a 5 to 10-year repayment schedule, and comparatively low interest rates, typically in the range of 4.7-6.75%.

Underwriting for these loans may take months, as lenders will generally order an appraisal of the property and will want to see complete borrower and property financials.  Among other things, requirements may include a personal FICO score of 700 or more and at least one year of business financial data.  This most traditional type of commercial real estate financing is most frequently used by investors looking to buy an existing, occupied asset with positive cash flow.

Balloon loans are a variation of conventional commercial real estate lending.  These loans have shorter terms (typically 3-7 years), and either have a longer amortization period (perhaps 30 years) or require interest-only payments.

This allows for smaller monthly payments for the life of the loan with the final balance due in one large “balloon” payment.

A balloon loan may be a good fit for borrowers who cannot afford large monthly payments at the time of purchase but expect to have greater resources when the final payment comes due.

It might also be right for investors who plan to sell the property at a profit at the end of the loan term and use part of the proceeds to make the final payment.

Hard Money Loans

In CRE, hard money lending consists of loans provided by private investors (individuals or companies) who lend money based mainly on the value of the property.  There’s usually limited reference to the borrower’s credit rating or overall financial standing.

Because underwriting standards for hard money loans are much lower than conventional loans, financing can usually be secured in days or weeks, rather than months.

Hard money loans are typically short-term, with repayment periods ranging from 6 to 24 months.  Interest rates are much higher than those of conventional commercial real estate loans (ranging from approximately 10-18%) and up-front fees are more expensive too.

Commercial hard money loans are often used to fix and flip property, when quick financing is needed (with future refinancing under more favorable rates in mind), or when borrowers don’t have the credit background necessary to qualify for other types of commercial real estate financing.

SBA Loans

The U.S. Small Business Administration offers two types of loans that may be applicable to commercial real estate investors – SBA 7(a) loans and SBA 504 loans.  Because the SBA guarantees repayment of a portion of the loan, lenders charge some of the lowest interest rates for SBA commercial real estate loans.  SBA 7(a) loans are the most popular SBA loan option.

Funds obtained through these flexible loans can be used for owner-occupied commercial real estate purchases (with the borrower’s business occupying at least 51% of the square footage), working capital, debt refinancing and more.  The maximum amount of financing available through an SBA 7(a) loan is $5 million.  Interest rates are currently in the 7-10% range.

SBA 504 loans don’t have a maximum loan amount. They can be used to purchase, build or improve owner-occupied commercial real estate or to purchase long-term business equipment.  Maximum interest rates for these loans are currently in the 4-7% range.

There are a number of requirements borrowers must meet to qualify for an SBA loan program.

These include restrictions on:

  • Business size

  • Location (US-based businesses only)

  • Business type

  • Borrower character, credit and business background

  • For existing businesses, business credit score and financial situation

See the SBA Eligibility Questionnaire to help determine if you qualify for an SBA loan.

Both types of SBA loans require collateral, a personal guarantee from anyone who owns 20% or more of the business, and a 10% down payment.  The repayment terms for both loan types will depend on the purpose of the loan, and pre-payment penalties do apply. SBA loans are processed through many large U.S. banks as well as some credit unions and certain specialized lenders.

Bridge Loans

Bridge loans offer short-term financing for commercial real estate purposes.  Loan terms range from 6 months to 3 years and interest rates are in the 6-9% range.  Business owners will typically need a credit score of 650+ and a 10-20% down payment to obtain a bridge loan.

At 15 to 45 days, bridge loans have a shorter approval process than conventional loans.  These loans are often used to obtain temporary financing while improving one’s credit profile, completing a longer-term loan application process, or building or renovating commercial property.

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