Commercial real estate (CRE) loans are offered as a lending product from banks or other financial institutions to assist in the acquisition, renovation, or construction of commercial properties. CRE is defined as a property that will be utilized for business purposes, such as office spaces, restaurants, retail stores, investment properties, industrial facilities, and more.
Who a CRE Loan Is Right For
CRE loans can be a viable option for a wide variety of businesses looking to get a small business loan and provide ample opportunities for growth, whether for expansion, maintenance, refinancing, or something similar.
A CRE loan may meet your needs if you have:
- A business looking to invest in real estate: If you’re interested in purchasing a commercial property, a CRE loan can provide you with financing to acquire the asset for your business.
- A business seeking funding for renovations or repairs: If you have an existing commercial property, a CRE loan can assist with renovations or maintenance needs of the building.
- A business that wants to build a property: If your business wants to construct a new commercial property, a commercial loan can help to finance the project.
Commercial Real Estate Loan Types
| Loan Type | Interest Rate | Maximum Loan Amount | Funding Timeline | Loan Term |
|---|---|---|---|---|
| SBA 7(a) | Starts at base rate plus 3% | Up to $5 million | Within 30 days | Up to 25 years |
| SBA 504 | Pegged rate above current 10-year United States Treasury note | Up to $5.5 million | 30 to 90 days | Up to 25 years |
| Conventional Commercial Mortgage Loan | Varies, generally between 5% and 8% | No limit | 30 to 45 days | 5 to 25 years |
| Commercial Bridge Loan | Generally between 6% and 12% | Varies, usually up to 85% loan-to-cost (LTC) ratio | 1 week to 30 days | 12 to 36 months |
| Commercial Hard Money Loan | Generally between 7% and 15% | Varies, usually 65% to 80% LTC | 1 to 2 weeks | 12 to 36 months |
SBA 7(a) Loan
| Interest Rate | Starts at base rate plus 3% |
|---|---|
| Maximum Loan Amount | $5 million |
| SBA Guarantee Fee | 0% to 3.75% |
| Loan Term | Up to 25 years |
| Minimum Down Payment | Starts at 10% |
| Loan-to-Value (LTV) Ratio | Up to 90% |
| Disbursement Timeline | Typically within 30 days |
| Minimum Credit Score | Generally 650 |
|---|---|
| Business Age | Minimum of 2 years |
| Debt Service Coverage Ratio (DSCR) | Generally 1.25x |
| Collateral | No additional collateral required |
| Owner Occupancy | Existing property 51%; new construction 60% |
Small Business Administration (SBA) 7(a) loans offer low interest rates, are backed by an SBA guarantee, and have a maximum loan-to-value of 90%. Since these loans are backed by the government, there are certain eligibility requirements necessary to facilitate a loan.
These loans provide up to $5 million in financing and have a loan term of up to 25 years. Loans with a maturity of 15 years or longer are subject to a prepayment penalty if the borrower pays more than 25% of the loan amount within the first three years from disbursement. The prepayment fee is 5% of the amount of prepayment during the first year, 3% during the second year, and 1% during the third year.
SBA 7(a) loans have varying interest rates dependent on the lender. However, the maximum interest rate is dependent on the loan amount. Loan proceeds can be used to finance the purchase, construction, or renovation of a commercial property.
SBG Funding is an excellent resource and provider of SBA 7(a) loans. You can apply online with a few simple questions and receive funding after approval.
SBA 504
| Interest Rate | Pegged rate above current 10-year US Treasury note |
|---|---|
| Maximum Loan Amount | $5.5 million |
| SBA Guarantee Fee | 0% upfront guarantee fee |
| Loan Term | Up to 25 years |
| Minimum Down Payment | Starts at 10% |
| LTV Ratio | Up to 90% |
| Disbursement Timeline | Within 30 to 90 days |
| Minimum Credit Score | Generally 680 |
|---|---|
| Business Age | Minimum of 2 years |
| DSCR | Generally 1.20x |
| Collateral | Typically requires no collateral other than the asset being financed |
| Owner Occupancy | Existing property 51%; new construction 60%. |
SBA 504 loans offer fixed-rate, long-term financing and provide loan amounts of up to $5.5 million for commercial assets that provide opportunities for business growth and job creation. They are facilitated exclusively by Certified Development Companies (CDCs), which are certified and regulated by the SBA and which have the purpose of providing community-level economic development. Click here to find a CDC near you.
An SBA 504 loan can be used to finance a variety of commercial assets including, but not limited to, the purchase, construction, or renovation of a commercial property, specific to those that will create job opportunities and growth of your business. Interest rates vary by lender and CDC and typically are structured to an increment above the current market rate for the 10-year US Treasury notes.
To qualify for an SBA 504 loan, your business must operate as a for-profit company in the US and have a tangible net worth value no greater than $15 million. Your net income must also not exceed $5 million (after federal income taxes) for the previous two years before applying.
Lendio is a great resource to help you find an SBA 504 lender. Visit Lendio’s website to learn more and begin the application process.
Conventional Commercial Mortgage Loan
| Interest Rate | Typically between 5% and 8% |
|---|---|
| Maximum Loan Amount | No maximum |
| Loan Term | Up to 25 years |
| Minimum Down Payment | Varies, typically from 20% to 30% |
| LTV Ratio | Up to 80% |
| Disbursement Timeline | 30 to 45 days |
| Minimum Credit Score | Generally 680 |
|---|---|
| Business Age | Minimum of 2 years |
| DSCR | Varies, typically 1.25x |
| Collateral | Additional collateral may be required |
| Owner Occupancy | At least 51% |
A conventional commercial mortgage loan is issued by a bank or lending institution for the purpose of financing the acquisition, refinance, or renovation of a commercial property. Unlike SBA-backed loans, conventional mortgages have no maximum loan amount and, therefore, generally have stricter requirements to qualify, including a heftier down payment and strong credit history.
Interest rates will vary depending on the lender. However, these rates generally fall between 5% to 8%―potentially higher. Loan terms can range anywhere from five to 25 years with a variety of fixed or adjustable payment schedules.
Typically, a minimum credit score of 680 is required. However, the requirement will likely lean more toward 700 for most lenders. Also taken into account is time in business, with most lenders requiring two years or more. These loans also usually require a larger down payment, so they may be suited better toward businesses that have the financial capacity to fulfill the lender’s terms.
U.S. Bank
Commercial Bridge Loan
| Interest Rate | Typically between 6% and 12% |
|---|---|
| Maximum Loan Amount | Varies, usually up to 85% LTC |
| Loan Term | 12 to 36 months |
| Minimum Down Payment | Typically 10% to 20% |
| LTV Ratio | Up to 80% |
| Disbursement Timeline | 1 week to 30 days |
| Minimum Credit Score | Generally above 600 |
|---|---|
| Business Age | Minimum of 2 years |
| DSCR | Varies; typically 1.20x |
| Owner Occupancy | No additional collateral required |
Commercial bridge loans provide short-term financing for the purchase of a commercial property with additional funds extended for the rehabilitation of the property. They are used to “bridge” the gap for borrowers who may be ineligible for permanent traditional financing due to the structural or health hazards of the property they’re acquiring.
There’s more risk involved with commercial bridge loans, due to the value being based on the LTC ratio or after-repair-value (ARV). Since your loan amount is determined by the value of your collateral, there’s more potential risk for the lender that, in turn, typically means higher interest rates―anywhere from 6% to 12%.
AVANA Capital is a commercial bridge loan provider that offers fast financing solutions. Visit its website to learn more or to submit a request for a bridge loan.
Commercial Hard Money Loan
| Interest Rate | Typically between 7% and 15% |
|---|---|
| Maximum Loan Amount | Varies; typically 65% to 80% LTC |
| Loan Term | 12 to 36 months |
| Minimum Down Payment | Typically 10% to 40% |
| LTC/ARV | Typically 90% LTV and 75% ARV |
| Disbursement Timeline | 1 to 2 weeks |
| Minimum Credit Score | Varies; typically 600 and above |
|---|---|
| Business Age | Varies |
| Funds First-time Flippers | Yes |
| Borrower Qualifications | Varies; personal income qualifier not required |
Hard money loans are short-term solutions for businesses looking to invest in CRE that otherwise may have difficulty in securing traditional financing due to poor credit or dilapidation of the property. These loans are often considered a last resort solution due to their high interest rates and fees and generally are aimed at borrowers looking to fix and flip a commercial property.
There are many variables in regard to the structure of a hard money loan. Loan terms usually are around 12 months. However, these terms can be extended, if necessary. Loan amounts are dependent on the value of the collateral and elevate risk to the lender. This results in higher interest rates yet more lenient qualification requirements.
The upside to hard money loans is that they offer quick disbursement of funds to allow for competing with other buyers. After acquisition and renovation of the property, it’s then usually flipped to pay off the loan or refinanced with permanent financing.
Kiavi is a solid resource and offers hard money loans for a variety of borrowers. It facilitates quick closings and disbursements and offers competitive rates. Visit its website and fill out a free application to find out if you qualify.
Frequently Asked Questions (FAQs)
What is the most common CRE loan?
A conventional mortgage is the most common CRE loan.
Are most CRE loans fixed or variable?
They can be either fixed-rate or variable-rate loans, depending on the terms set by your lender. Often you’ll be given a choice of the two when receiving your approval letter, which you can discuss with your lender upon drafting the structure of your loan agreement.
What is the typical term of a commercial loan?
The typical term varies anywhere from five to 25 years, although shorter-term options are available.
Bottom Line
Depending on your business needs, CRE loans can be used to purchase or refinance a commercial property, finance renovations of an existing property, or provide funding for construction.
If you’re thinking a CRE loan may benefit your business, make sure to explore the various options available, compare commercial loan rates, and check the lender’s credit requirements.
