5 Types of Commercial Real Estate Loans

A commercial real estate loan (CRE) helps businesses finance their expansions, whether buying, improving, or renovating properties for commercial purposes.

Unlike residential loans given to eligible individuals to build or develop personal residences, business entities or owners can apply for lending specifically for income-producing ventures such as:

• Hotels
• Office buildings
• Apartment complexes
• Shopping centers or retail stores
• Restaurants
• Industrial buildings
• Warehouses

While commercial real estate loans tend to be higher in value than residential loans, they typically have steeper interest rates, making them more expensive to repay. Commercial real estate loans usually have shorter terms, unlike conventional 15–30-year mortgages on residential properties.

Financial institutions like banks, lending and insurance companies, private investors, and other government-backed lenders like the U.S. Small Business Administration (SBA) offer CRE loans. Loan requirements vary from one lender and loan type to another. The typical factors that lenders look for include the following:

• Business income and expense trends
• Personal and business credit scores
• Debt service coverage ratio
• Balance sheet
• Overall financial performance
• Borrower payment history

Types of Commercial Real Estate Loans

Commercial real estate loans are categorized into long- and short-term loans. The various options under each category have different terms, rates, requirements, and purposes. Business owners and commercial entities can choose which type best fits their needs.

Long-Term Commercial Real Estate Loans

Like traditional residential loans, long-term CRE loans offer 5–25-year repayment terms. They can be used for construction, property purchases, and development.

1. Traditional Commercial Mortgages

Commercial mortgage loans are comparable to residential mortgages because they have similar, longer repayment schedules ranging from 15–20 years. Getting approved for commercial mortgage loans is typically more challenging because of the stringent requirements and stricter approval process.

Banks and other lending institutions are generally cautious before loaning large amounts to companies because they understand the risks involved. They require high personal and business credit scores and proof that businesses create enough revenue to repay loans. The tradeoffs are lower interest rates and higher loan-to-value ratios than other types.

1. Small Business Administration (SBA) Loans

Small business owners can apply for SBA loans to finance expansion, property purchases, and improvements. They are popular among borrowers due to their flexibility and longer payback schedules. The two most common SBA loans are:

1. 7(a) loans: Businesses can use this loan to build working capital with a variable interest rate. It’s ideal for companies that must buy supplies, procure additional equipment, or fill gaps in their cash flow.
2. 504 loans: 504 loans offer fixed-rate financing for real estate purchases or improvements. This SBA loan is ideal for purchasing, renovating, or leasing properties, buildings, or equipment.

Businesses must meet specific criteria to qualify for different commercial real estate lending types under the SBA umbrella. Interested parties can refer to the U.S. SBA program to see which loan program suits their needs and capabilities.

Short-Term CRE Loans

Short-term loans are perfect for borrowers who fail to qualify for long-term commercial real estate lending programs and businesses that need financing quickly for their projects.

3. Bridge Loans

Bridge loans provide quick coverage for borrowers who must upgrade to smart building systems or do minor renovation projects for their real estate properties. They are payable in shorter periods, typically six months to three years. This type is ideal for borrowers who need to fill in gaps in their financing while waiting for their long-term loans to be approved.

The application and approval process for bridge loans is much faster since lending companies process smaller amounts than traditional commercial loans. Due to their shorter repayment nature, they usually have higher interest rates than long-term CRE loans. Borrowers must weigh their repayment capabilities before taking on higher-interest bridge loans.

4. Commercial Construction Loans

Construction loans are geared toward building commercial structures and renovating existing properties. Credit unions and banks typically offer them to businesses that want to develop income-producing buildings from the ground up. Unlike traditional commercial loans, this short-term option often releases funds in a staggered manner instead of single lump-sum payments.

Construction loans have short terms — ranging from 6–24-month periods — and cover various expenses necessary to build commercial properties. Some of these include the following:

• Labor costs
• Renovations
• Construction materials
• Professional fees for architecture, appraisal, design, etc.
• Landscaping services
• Subcontractors
• Permanent fixtures

5. Hard Money Loans

Business owners strapped for cash can choose to apply for hard money loans because of their quick turnaround time and convenient application process. This short-term loan bypasses the lender route and is typically issued by private lending companies and individuals.

Hard money loans have a higher interest rate than long-term financing programs. Lenders that offer them typically only need a little proof of repayment capabilities. Private lenders are more interested in the property’s value set up as collateral since they can recoup losses by selling it if a borrower cannot pay the debt.

Commercial Real Estate: A Balancing Act in Modern Business

Commercial real estate lending can significantly help expand business reach and potential. While loans are generally valuable tools, borrowers should weigh their options and capabilities to ensure profitability and stability. Even more importantly, after purchasing their property, they should take great pains to track their entire portfolio, including loans, to facilitate easier loan approval in the future.

STRATAFOLIO can help you with tracking loans and much more! Contact us today for more information.