Commercial real estate loans are used to buy and renovate properties that are designated to earn a profit. They apply to diverse kinds of commercial enterprises, ranging from office buildings to warehouses to retail centers.

Learn About Criteria

Lenders usually require that your business occupies at least 51% of the property. Before you apply, your paperwork should be in order, including financial statements and a solid business plan. Typical criteria include your personal credit score, amount of liquid cash on hand, net worth, debt level, applicable business experience, and your personal and business income.

Know the Terms for Repayment

It’s important to understand the payment schedule and any early repayment fees. Most commercial loans are for 5 to 20 years, which is shorter than most home mortgages. Paying off the debt early often incurs additional charges since lenders have calculated their profits based on the loan’s full duration.

Understand the Types of Loans

There are multiple types of commercial real estate loans but three of the most common are traditional commercial mortgages, SBA 7(a) loans for commercial real estate, and CDC/SBA 504 commercial real estate loans.

For a traditional commercial mortgage, the amount is established between the lender and borrower and has no federal cap. The amount is typically based on a percentage of the real estate’s loan-to-value (LTV) comparison. The LTV is the comparison of the total mortgage loan amount to the total purchase price. A traditional loan normally requires a higher personal credit score than a Small Business Administration (SBA) loan but fewer years in business.

An SBA 7(a) loan is made by an SBA-approved lender, such as a bank, credit union, or private lender. Because borrowers are following federal SBA guidelines, lenders typically have more confidence that they will recover the full amount. The maximum amount can range as high as 85% to 90% of the purchase price. An SBA 7(a) loan requires three years of business history.

A CDC/SBA 504 loan is designed specifically for commercial real estate properties. Half of the money comes from the lender, with 40% from a local community development corporation (CDC), and then 10% from the borrower’s down payment. A business must meet the local CDC’s public policy and job-creation goals but there is no pre-defined cap on what you can borrow.

If you are thinking about acquiring or upgrading real estate for your company, a loan might help you reach your goals. Knowing the requirements and lending types can help you gather the right paperwork and prepare for your next steps.