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7 Types of Commercial Real Estate Loans Available to You

financing commercial property

Financing is an essential element to securing a commercial business location in most instances. But what are the options and how do you qualify? Click here as we detail seven types of commercial real estate loans to get you started.

There are 28 million small businesses in the United States and that number continues to grow.

Securing a place for your business to operate out of is an important step in starting your own business. There are many different commercial real estate loans out there. It can be hard to figure out which ones you qualify for.

Read below to discover seven types of commercial real estate loans available to you.

1. Traditional Commercial Mortgage

Traditional commercial mortgages are like your home mortgage. These loans are through a bank or lending institution. You can use a traditional commercial loan to buy or refinance property for your business.

These loans don’t carry a maximum loan amount. But, the loan can’t exceed 85 percent of the property’s loan-to-value ration. You as the buyer must provide at least 15 percent of the property’s value as your down payment. Your specific loan amount will be up to each individual lender.

Traditional commercial mortgages have interest rates between 4.75 and 6.75 percent. You will have monthly amortized payments over the term of your loan. These loans can range anywhere from five to 20 years.

Lenders require your business to operate for at least a year before receiving a mortgage. Your business also must occupy at least 51 percent of the property. For best approval odds, you should aim for a credit score above 700.

2. Multifamily Loans

Multifamily loans are for properties with five or more units. These are most often used for apartment buildings or condominiums. These loans are available for acquisition, construction, and refinancing of existing properties.

To be applicable to receive a multifamily loan, keep the following metrics in mind:

  • Debt service coverage ratio. This is the property’s net operating income divided by the yearly debt service. You should aim for a ratio of 1.15 or higher.
  • Loan to cost ratio. This includes all costs to build the multifamily property. You should aim for a ratio of 80 percent or lower.
  • Loan to value ratio. This compares the size of your loan to the fair market value of the property. You should aim for a ratio of 80 percent or lower.

There are a variety of multifamily loans available to fir your business needs. Consult with Assets America to learn more about multifamily loans.

3. Hard Money Loans

A hard money loan is secured to your commercial real estate. You don’t have to use this loan as buying money and is comparable to a cash advance.

You have to list your commercial property as collateral to receive this type of loan. These loans are temporary and often used when you need immediate financial help.

Private lenders don’t follow the same rules as standard lenders. Hard money loans have a high-interest rate and carry a high risk of default.

4. Joint Venture Loans

Joint venture loans is a business agreement between two or more parties. The parties choose to combine their resources to secure financing.

Each party involved are responsible for costs associated with buying the property. This includes the property’s profits and losses. This joint venture is separate from each participant’s individual business interests.

These loans are for when someone isn’t able to receive financing on their own. Private investors and investment firms offer joint venture loans to potential business owners.

5. Participating Mortgages

Participating mortgages occur when a lender becomes an equity partner in your business. Using a participating mortgage means your lender shares in your profits.

Because your lender receives a part of the net income, you receive a lower interest rate. You, as the borrower, will pay your monthly mortgage as well as a monthly share of the property’s profit.

Participating mortgages are most popular with office or retail properties. Lenders provide this mortgage when there is a good history of long-term lease tenants.

6. SBA 7(a) Loans

An SVA 7(a) loan is one of the most common types of commercial real estate loans. The U.S. Small Business Administration supports these loans.

SBA loans allow business owners to buy or refinance an existing commercial property. You may also construct a new property. To qualify for a loan, your business must have less than 500 employees.

Your business must also have less than $7 million in annual receipts.

Other requirements include:

  • A credit Score of at least 680.
  • No recent bankruptcies, tax liens or foreclosures. This applies to both personal and business property.
  • Collateral if your loan is over $25,000.
  • A down payment of at least 10 percent.

Business owners use this program to receive a loan of up to $5 million through an SBA affiliated lender. These amortized loans can last for up to 25 years.

7. SBA 504 Loans

SBA 504 loans work best for owner-occupied real estate. These loans pair businesses up with a bank and a community development corporation.

An SBA 504 loan is actually two loans. Your first loan consists of 40 percent loaned from the community development corporation. The remaining balance will come from a bank.

Requirements for an SBA 504 loan include:

  • Your business occupying at least 51 percent of the commercial space.
  • A credit score of at least 660.
  • A down payment of 10 percent of the total project cost.
  • A net worth less than $15 million.

SBA 504 loan interest rates can vary from 4 to 6 percent depending on the lender. These loans offer repayment terms of up to 25 years.

Choosing Your Types of Commercial Real Estate Loans

Now you know all about the different types of commercial real estate loans. The next step is choosing the best loan for your business.

Keep the following factors in mind:

  • What are the interest rates associated with the loan?
  • Do I need a specific credit score to qualify?
  • What is the required collateral or down payment?
  • Do you want an investor or partner involved with your business?
  • How much money do you need to borrow?
  • What happens if I can’t make a payment fail to repay back the loan?

Choosing a commercial business loan isn’t a decision to take lightly. But finding the right loan can get your business off to a great start.

For more help and tips for creating your future business, read our blog.

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