Commercial real estate financing is critical to business owners who require a commercial property loan to buy new property, develop existing ones, or refinance their current commercial real estate loan. Commercial property loans come in various forms and sizes, and it’s essential to understand the different types of loans available, how each one works, and which one is best for you.
What is a Commercial Property Loans
A Commercial property loan is a type of financing that businesses use to purchase properties or develop existing ones to support their operations. This type of loan comes in two different types, where the first type is either secured or unsecured. Secured commercial property loans are typically backed by collateral, such as a lien on the property or a personal guarantee. Unsecured loans generally have higher interest rates and fewer collateral requirements.
Investors often seek out commercial real estate financing to purchase a property in the hopes of earning a return on investment over time. Some common types of commercial real estate loans include traditional bank loans, Small Business Administration (SBA) loans, and private lending. Each of these options carries different requirements, benefits, and drawbacks, depending on the specific needs of the borrower and the type of property.
Traditional Bank Loans:
Traditional bank loans are often the go-to financing option for commercial property loans. These loans usually have low interest rates, long repayment periods, and low origination fees. The amount you can borrow depends on your credit score, the value of the property, and your ability to pay back the loan.
The downside of traditional bank loans is that the application process can be lengthy and often requires a lot of documentation, such as financial statements and tax returns. The process can also be challenging for new businesses or startups that lack a proven financial track record.
Small Business Administration (SBA) Loans:
For businesses that are struggling to get approved for a traditional bank loan, an SBA loan may be a more viable option. SBA loans are backed by the government and offer favorable terms such as longer repayment periods and lower interest rates.
An SBA loan is technically a guarantee. The SBA agrees to pay back a portion of the loan if the borrower defaults, making it easier for lenders to approve loans that they might be hesitant to provide otherwise. SBA loans are typically given to small businesses that have been operating for at least two years, with a proven track record of profitability.
The downside of SBA loans is the long application process, which can take several months to complete. The process also requires more documentation than traditional bank loans, including business plans, financial statements, and tax returns. For businesses that need funding quickly, an SBA loan might not be the best option.
Private Lending:
Private lenders provide commercial property loans for businesses that do not meet the criteria for traditional bank loans or SBA loans. Private lenders offer flexible repayment terms, higher loan amounts, and faster processing times than traditional lenders.
Private lenders are typically less concerned with borrowers’ credit scores and financial history, taking a more personalized approach to evaluating loan applications. They may require less documentation than traditional lenders and can provide funding more quickly.
The downside of private lending is the higher interest rates and fees associated with these loans. Private lenders may also require more significant down payment amounts, making it more challenging to secure sufficient funding for new purchases.
Types of Commercial Property Loans:
Commercial property loans come in a variety of types, including commercial real estate loans, SBA 7(a) loans, and commercial bridge loans. Each type of loan serves different needs and provides different benefits to businesses looking to finance their operations.
Commercial Real Estate Loans:
Commercial real estate loans are the most common type of commercial property loan and are typically provided by banks or other traditional lenders. These loans are used to purchase or refinance a commercial property, such as an office space, retail storefront, or industrial warehouse.
Commercial real estate loans are typically secured by the property itself, and the amount you can borrow depends on the value of the property and your ability to pay back the loan. These loans can have repayment terms ranging from five to twenty-five years and carry interest rates ranging from 4% to 13%.
SBA 7(a) Loans:
SBA 7(a) loans are a type of government-backed loan program that provides funding to small businesses for a variety of purposes, including purchasing or refinancing a commercial property. SBA loans are secured by the property itself and require a down payment of 10% or more.
SBA loans offer longer repayment terms than traditional loans, ranging from ten to twenty-five years. These loans typically have lower interest rates than other commercial property loans, ranging from 4.25% to 13.75%. However, the application process for SBA loans can be lengthy and requires extensive documentation.
Commercial Bridge Loans:
Commercial bridge loans are short-term loans used to bridge the financial gap between purchasing a property and securing long-term financing. These loans are typically used by businesses looking to purchase distressed or undervalued properties that require significant renovations or repairs.
Commercial bridge loans usually have short repayment periods, ranging from six months to three years, and carry higher interest rates than other types of loans. The loan is secured by the property being purchased, and lenders may require a larger down payment amount than other types of loans.
Commercial Property Loan Rates:
The interest rates for commercial property loans depend on the type of loan, lender, and borrower’s financial standing. Traditional bank loans and SBA loans typically have lower interest rates than other types of loans and are more accessible to businesses with a proven financial track record.
Private lenders provide commercial loans to businesses without strong credit ratings or financial histories, often at higher interest rates than traditional loans. These lenders take on more risk in providing loans to less creditworthy borrowers and, as such, charge higher interest rates.
The Bottom Line:
Commercial property loans are a necessary part of doing business for many companies. Understanding the different types of loans available and their various requirements and benefits is critical in choosing the right financing option for your business.
Traditional bank loans and SBA loans are the most common types of commercial property loans and offer attractive repayment terms and interest rates. Private lenders provide loans to businesses that are unable to secure traditional financing due to poor credit or financial history. Commercial bridge loans can bridge the gap in funding between purchasing a commercial property and securing long-term financing.
Taking the time to comprehend your choices and needs, including those related to ‘loan against property,’ can assist you in making well-informed decisions about the most suitable commercial property loan for your business’s current and future requirements.
