How to Get a Commercial Real Estate Loan: What Do Lenders Consider?

How to Get a Commercial Real Estate Loan

A commercial real estate loan to finance the purchase of the commercial property. It is often for major business purchases such as setting up new facilities (e.g., a warehouse, store, or office) or expanding existing ones. This type of loan, similar to a residential mortgage for business properties, depends on several factors. These factors can vary depending on the source of the loan. The Small Business Administration (SBA) offers programs that guarantee commercial real property loans.

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  • How do I get a commercial realty loan
  • What should lenders be looking for?
  • How do you prepare for the application process
  • How to get a loan for commercial real estate

How to obtain a commercial real estate loan

Commercial real estate loans can buy or renovate a commercial property. Lenders will usually require that the owner occupies the property. This means that your business must occupy at least 51%. You will need to determine the type of commercial real estate loan you require based on your property and business. Then, narrow down your options.

What are the key criteria lenders should be looking for?

Before granting a small business a commercial loan, lenders typically require you to meet three requirements. These requirements will likely be related to your business finances, personal finances, and property characteristics.

Finances for businesses

Commercial real estate loans are typically very difficult to obtain. Small businesses are often considered risky and don’t succeed. Commercial lenders and banks will review your books to ensure you have the cash flow to repay the loan.

Lenders will likely calculate your company’s debt coverage ratio. Your annual net operating (NOI) by your total debt service. It is the amount you have to pay back principal and interest. A typical requirement is a ratio of 1.25 or higher. If your company is debt-free and you apply for a $100,000 commercial real property loan, the lender will require that you generate an NOI of at minimum $125,000.

Business credit

The lender will check your credit score to assess your ability to obtain a commercial loan. This will help determine your eligibility. The loan terms will be determined, including interest rate, payment period, and down payment. For SBA 7(a), the flagship loan program of the government agency, the minimum FICO Small Business Scoring Service credit score (SBSS) is 155. However, many exceptions allow small businesses to obtain a loan with a lower score than this minimum.

A loan for real estate to a sole proprietorship is considered personal, not commercial. It could put your wealth at stake if you default. The rest of the information for you is on our online demand website.

Personal finances

A few owners or partners control small businesses. Banks and commercial lenders may want to review your credit history and personal credit score to determine if you have had any financial difficulties. It includes defaults, foreclosures, tax liens, court judgments, and tax liens. Low personal credit scores could impact your chances of getting a commercial loan approved for your company.

Characteristics of property

The loan by collateral. If you do not pay the loan on time, the lender attaches a lien to your property. A commercial real estate loan will not be available to small businesses that occupy less than 51% of the property. You should apply for an investment property loan suitable for rental properties.

Hard-money loans

Lenders unable to pay the borrower’s creditworthiness will often base their loans solely on property values. Commercial buildings, shopfronts, and facilities such as warehouses or laboratories are eligible properties. Single-family residences will not be eligible, but multi-family properties maybe if your business is within 51% of the property.

Commercial real estate loans typically have a loan-to-value ratio (LTV) between 65% and 80%. If the property has a value of $200,000 and the lender requires that you pay a 70% LTV, you will need to deposit $60,000 to get a loan for $140,000.

How to prepare for the application procedure

Commercial mortgage applications can take a while and require a lot more documentation. On the other hand, you may be able to get a hard-money loan within days of applying without having to provide extensive financial information.

Banks and lenders will generally require this information.

  • Returns on business taxes
  • Financial reports, books, and records
  • Bank statements for the last three months or more
  • Details regarding collateral
  • Appraisal of the property by a third party
  • Business plan

On the other hand, a hard-money lender will focus only on the property’s current and projected value and require fewer financial disclosures.

How to increase your chances of being approved

Applying for a commercial realty loan may be more difficult for business owners with bad credit or new businesses. You can do some things to increase your chances of getting a loan.

  • You can improve your credit score by paying debts and taking other steps.
  • If you have additional collateral, consider pledging it
  • Add an investor or cosigner
  • Accepting to pay a higher down payment and a higher interest rate
  • Choose a less expensive property

Where can I get a loan for commercial real estate?

There are many places you can get a commercial loan for your business. To find the best commercial loan rate, compare rates from different lenders.

Here are the pros and cons of working with different types of lenders.

Banks

Many banks offer commercial financing for different types of properties. A typical traditional bank loan amount is approximately $1 million.

Pros:

  • Rates are good
  • As a bank customer, you may be eligible for discounts and convenience
  • Options for long-term financing

Cons:

  • Requires extensive documentation
  • Slow process
  • Only for borrowers who have excellent or good credit

Commercial lenders

Non-bank finance companies can also provide small and medium-sized commercial real estate loans. Commercial loans have higher rates than banks, but this may be an option if you urgently need a loan.

Pros:

  • Less rigid underwriting standards
  • Banks take longer to approve
  • Closing costs and fees that are lower

Cons:

  • Banks have higher interest rates than banks.
  • May be required to make a balloon payment within 5-10 years
  • Many of these loans are short-term.

SBA 504 loans

These loans can be used to purchase long-term equipment or real estate. These loans of two loans. One loan is typically from a bank for 50%, and one loan is from a Certified Development Company (for up to 40%). 

Pros:

  • Below-market interest rates
  • Terms of 20 and 25 years
  • Low down payment

Cons:

  • Must meet SBA size standards
  • Slow funding process

SBA 7(a), loans

Using the SBA flagship loan, you can borrow up to $5,000,000 through an affiliate lender. These loans can be for construction, renovations, and purchases of land or buildings. The prime rate plus a few percentage point margins is the rate.

Pros:

  • Competitive interest rates
  • Terms up to 25 Years
  • Many loans can be fully amortized

Cons:

  • There are limits on the company’s size
  • You must have a satisfactory credit score
  • Long approval process

Note: SBA-guaranteed loans require at minimum 51% owner occupancy in existing buildings and at least 60% for new construction.

Hard-money lenders

Hard money loans are short-term loans based on the property’s value. Private companies usually make these loans and have higher down payments. The loan application process is much simpler than traditional mortgages, and the loan can be obtained faster.

Pros:

  • It doesn’t assess a borrower’s credit rating
  • Rapid approval
  • Easier to qualify for

Cons:

  • Higher interest rates
  • The average LTV ratio ranges from 60% to 80%
  • Short-term financing

Conduit lenders

Conduit loans, commercial mortgages, are pools of other commercial loans that are then sold to investors in a secondary market. Conduit lenders typically finance between $1 million and $3 million. They can also finance up to $50,000,000 with terms of five to ten years. Amortization is usually spread over a longer period, lowering monthly payments. However, you will pay the remaining balance in one lump sum payment.

Pros:

  • Low-interest rates
  • The loan term is longer than the amortization period
  • The non-recourse loan doesn’t require a personal guarantee

Cons:

  • Balloon payment after the 5-to-10-year term
  • Significant prepayment penalties

P2P Marketplaces

Crowdlending platforms connect borrowers with individual lenders. Many marketplaces specialize in commercial lending. These services can act as a bridge loan to fund short-term projects until longer-term financing is available.

Pros:

  • Quick turnaround
  • Access to loans for all credit scores
  • Simple application

Cons:

  • High-interest rates may be possible
  • High origination fees
  • Traditional lenders have fewer regulations

For general inquiries:

  • Email: sales@commerciallendingusa.com
  • Phone: +1 (571) 544-6600