How to Get a Commercial Real Estate Loan
While renting has its perks, you could start building equity in your business if you could get a commercial loan to buy your space. In addition to paying thousands of dollars each month into your landlord’s investment, there will always be uncertainty regarding if they’ll renew your lease when it ends and how much higher your new rent will be. It can be hard to plan for the future of your business without knowing if you’ll even be in the same location in a few years. Learning how to get a commercial real estate loan could help you save money, build equity, and commit to a long-term plan for your business.
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Different Types of Commercial Real Estate Loans
A commercial real estate loan is simply a real estate loan meant for commercial use, which could be used for business or investment property. There are several different types of commercial real estate loans:
- Bank loans: Banks can offer good rates and convenience, especially if you already bank with them in other capacities, but they require a rigorous application process and, depending on market conditions, they move criteria as the market adjusts. For small and mid-size businesses, a local or regional bank is ideal, as they tend to be relationship-based. For larger firms and purchases over 10 million, a national bank will provide more competitive rates and terms, however, they require a strong financial and strong credit score. Most bank loans require a personal guarantor. Rates are generally tied to the prime rate and will run 1% to 2% over prime. Down payment requirements will be 20 to 30%. Most loans will have a five to ten year maturity period, with the loan amortized over 20 to 25 years. Most commercial bank loans take 60 to 120 days to approve and fund.
- Non-bank commercial loans: Non-bank financial institutions, such as insurance companies, typically offer larger loan amounts (most require loan amounts over $10 million), 25 to 30% equity requirement, and the most competitive interest rates, with no personal guarantee, but have stiff early payment penalties. Insurance companies require a strong credit borrower, established business, or strong balance sheet asset for investment properties. You will typically see their loans on large multi-family sites, industrial complexes and big box or mall retail centers.
Hard money is another non-bank loan type, which is opposite of insurance companies. Their qualifying is easier, will not require as much equity from the borrower, they will take lower credit scores, and they will do deals very quickly. The downside is they have higher interest rates, higher fees and shorter terms. These loans are generally used when you need a quick turn and plan to repay or refinance with a traditional bank loan.
- SBA 7(a) loans: The Small Business Association guarantees loans up to $5 million with 25 year amortization terms on real estate and below market interest rates (3.75 to 6%) to businesses that qualify as a small business. For this, the borrower must occupy 51% of the building. The SBA provides a portion of the loans and a cooperating lender provides the balance. The cooperating lender’s rates and terms are not as favorable as the SBA’s, but the blended rate and terms are still very competitive. SBA approvals will take 30 to 90 days to approve and fund. The down payment requirement is 10 to 20%. They will accept lower credit scores than bank lenders, but have strict requirements on no defaults or prior bankruptcies. Loan limits are $100,000 to $5 million. These loans are amortized of 25 years for real estate purchase, 10 years for equipment, and 10 years for working capital. Loan proceeds may be used for real estate purchase, equipment, furniture and fixtures, inventory, and working capital.
- SBA 504 loans: This SBA loan has more restrictive uses but has more competitive rates than its sister 7a loan. The loan terms are 10 to 25 years, the down payment is 10% to 20%, and there are small business qualification requirements. The one big difference between the 504 and 7a is the loan proceeds can only be used to acquire business or real estate but has a fixed interest rate for the loan term which could be between 10 to 25 years.
Requirements for a Commercial Real Estate Loan Application
If you’re wondering how to get a commercial real estate loan, be prepared to submit the following:
- Personal credit scores for all principals of the business
- Owner’s bio
- Personal and business financial records generally two years, but may go back three years
- A business plan – which includes acquisitions, target clients, projected sales, and marketing plan
- Projected cash flow for your business
To qualify for a commercial real estate loan application, your business must typically have a debt-service coverage ratio (DSCR) of at least 1.25. The DSCR is calculated by dividing its Net Operating Income (NOI) by its debt payments, including expected payments on a mortgage. Your business should also have a minimum FICO SBSS score of 140 out of 300 to qualify for many SBA loans, though commercial lenders will typically want a minimum score of 180. If your business is new and doesn’t have a credit history, you’ll need a personal FICO score of at least 650.
How to Find a Commercial Real Estate Loan Broker
Commercial real estate brokers work with banks or other financial institutions and can connect business owners with loans for properties they want to purchase. If you’re wondering how to get a commercial real estate loan, working with a broker is a great way to navigate this process. Even experienced business owners can benefit from partnering with one, as they can handle much of the work it takes to finance a commercial real estate purchase.
Wondering How to Get a Commercial Real Estate Loan or Need Assistance?
It takes business owners a significant amount of time and effort they don’t have to find, apply for, and obtain a commercial loan. Whether you’ve found the perfect spot or need help focusing your search, working with a broker can help you quickly identify and close on the right property for your business. Contact the Graham Team at Graham Team Commercial Real Estate for help today and we’ll bring our individualized approach to your search for financing. We’re dedicated to providing you with service, integrity, and results to make your business a thriving part of our community.