Commercial Mortgage Options

Most types of business lending options are long-term loans that have substantial years to pay off, whereas a hard money loan is considered to be short-term funding. Some online commercial lenders can also offer alternate types of commercial real estate loans, such as hard money loans or commercial bridge loans, that can be easier to qualify for. Many commercial bridge loans can be used to finance construction, making this kind of loan a good option for businesses or investors who need to renovate property.

You may be able to use a bridge loan to cover the purchase price of the property while you are waiting for the sale of another property or another kind of infusion of capital. If you own existing commercial properties, you can also use funds from the loan to expand the location you currently have. You can use the commercial real estate loan to construct a standalone building, purchase office space in a larger, mixed-use commercial hub, or even buy a residential property intended for rent by tenants.

With a commercial mortgage, you can also use the loan on your construction property to cover construction costs, should you not find any existing properties suitable to meet the needs of your company. There are other types of commercial real estate loans that go beyond the traditional commercial mortgage loans, which provide shorter terms and will be dependent on your unique company needs.

Interest rates for commercial mortgage loans may also vary depending on your lender, loan type, property value that you are financing, and the qualifications of your business. Currently, rates can vary between 3 percent to 20 percent, depending on the specific type of loan, property, and your personal financial situation. In cases where the loan is approved on the basis of property values, not borrower creditworthiness, rates can be higher.

Terms and rates can vary depending on lender and property being funded (see our guide to the average rates of commercial real estate loans for a better picture). Funding amounts and interest rates may vary depending on the particular property that you are looking to fund, how much equity you have available to put down, and your personal financial criteria. The loan structure and terms may look very different if it is being funded by a first-lien lender, such as a commercial bank or credit union, than it is a private-equity lender, or from the government debt markets (such as commercial mortgage-backed securities).

If you have strong credit and your company has a high debt-service coverage ratio, you can qualify for a conventional commercial mortgage with favorable rates and longer terms.

Fortunately, there are both bank and non-bank alternatives to commercial mortgage loans for the business owner who would rather explore a rental property or alternate financing options to purchasing property.

As with residential mortgage financing options, commercial owners typically benefit from refinancing loans on commercial properties with lower interest rates. However, the speed and flexibility comes at a price, since commercial real estate loans with online lenders typically carry higher interest rates and shorter terms than those with banks or the SBA. Unlike traditional 15-year and 30-year mortgages, business loans generally have a much shorter term.

While residential mortgages are generally made to individual borrowers, commercial real estate loans are typically made to corporate entities (e.g., corporations, developers, limited partnerships, funds, and trusts). Commercial mortgage loans are like conventional mortgage loans; but rather than borrowing to purchase a residence, you are guaranteeing some land or real estate for commercial purposes.

SBA 7(a) loans have a maximum term of 25 years for commercial properties, CDC/504 loans have a maximum of 20 years, and traditional commercial mortgages have maximum terms determined by the lender. SBA 7 (a) loans are the most common type of SBA loans, and help businesses buy or refinance up to $5 million in owner-occupied commercial property, while also providing an option to borrow funds for working capital needs. In addition to this program, SBA offers loans that are specific to either owner-occupied property or for longer-term equipment purchases.

SBAs flagship loan, 7(a) loans, may be used for the purchase of land or buildings, construction of new properties, or renovation of existing properties, as long as the properties are intended for owner-occupancy.

The SBAs most popular program, the 7 (a) loan has financing amounts up to $5 million. These loans comprise the two primary business loan programs offered through the Small Business Administration: 7 (a) loans and 504 loans.

Similar to the way that the Federal Housing Administration guarantees loans from the Federal Housing Administration, SBA provides guarantees on commercial loan programs. SBA CDC/504 loans, on the other hand, are designed specifically for financing large fixed-asset purchases, such as buying property or repairing commercial properties.

Bridge loans are generally used to fill funding gaps until longer-term forms of funding are secured. Business loans generally have terms of five years or less up to 20, and amortization periods are typically longer than the length of the loan. Commercial loans are also generally shorter than residential mortgages, and have terms that vary between five years and up to 20 years.

To qualify for a commercial loan, you will need good credit, a 25% or greater down payment, and plans to use most of the property being funded for your business. For example, let us say that you own commercial office space that is worth $500K, and that the lender offers a $350,000 loan to buy the property.

Construction loans are typically interest-only loans until stabilization, at which time they either turn into an amortized loan or need refinancing. These loans are interest-only, typically without any payments of any kind in cash for the duration of the loan. The loan amount is as low as $2 million (although $3 million is preferred), maximum loan to value is 75%, and mortgages are non-recourse at all times except for the usual carve-outs.

Commercial Hard Money Loans are best suited to property investors looking to rehab buildings prior to refinancing into a permanent mortgage. If you need quick funding–to compete, say, with a all-cash buyer on a commercial real estate property–an SBA loan or a conventional commercial mortgage may not cut it, since the timeline for funding these funding options can sometimes be months. SBA loan rates are competitive, but the complicated underwriting required means that you do not receive funds as quickly as you would for other types of financing.


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