How to Get a Commercial Real Estate Loan

How commercial real estate loans work

They are long-term loans secured by the property. Terms are shorter than home mortgages, often with a balloon payment or a rate that resets.

Where a home mortgage may run 30 years with a fixed rate, commercial loans often amortize over 20 to 25 years but come due earlier, such as at 5, 7 or 10 years. At that point you refinance or pay off the balance. Rates and terms vary with the lender, the property type and the borrower.

The lender evaluates both the property's value and the income it, or your business, can generate to support payments. See making sense of commercial real estate rates and commercial loans and financing.

Owner-occupied versus investment property

If your business uses most of the space, it is owner-occupied and may qualify for programs like SBA 504 or 7(a). Investment properties are underwritten on rental income.

Owner-occupied loans lean on your business's cash flow. Investor loans lean on the property's rent roll and vacancy. The distinction changes the down payment, documents and available programs.

Government-backed options for owner-occupied buildings exist and often offer lower down payments. See SBA 504 loans and SBA real estate loans, and confirm current terms with the SBA.

What lenders ask for

Expect a down payment, business and personal tax returns, financial statements, a debt schedule, property details, an appraisal and often an environmental review.

• Business and personal tax returns for the past few years
• Profit and loss statement and balance sheet
• A schedule of current debts
• Purchase contract or property details
• Appraisal and, for some properties, environmental assessment
• Proof of down payment funds

Lenders also review your debt service coverage. Our guide to debt service coverage ratio explains the test.

Run the ownership math

Compare total cost of owning with your current rent, including taxes, insurance, maintenance and the opportunity cost of the down payment.

Illustrative example: you pay $6,000 a month in rent. A building would cost $5,500 in loan payments, $1,000 in taxes and insurance and $500 in upkeep, or $7,000 a month, plus a down payment of $150,000. Ownership builds equity, but your monthly cash cost is higher and the down payment cannot be used elsewhere.

If the same $150,000 could expand your business and earn more than the savings from owning, renting may be better for now. Read buying commercial real estate for more.

Cash needs beyond the purchase

Closing costs, build-out, moving, equipment and a few months of reserves can add significantly to the purchase price.

Plan for appraisal, legal and title fees, inspection, renovations, signage and moving costs. Keep a reserve so a slow month does not threaten your payments.

This is where ROI Funder can help. For businesses with 500+ FICO, 6+ months in business and $20,000+ monthly revenue, equipment financing can fund machines and fixtures, and working capital can cover operating costs during the move. These do not replace a mortgage, and are not a fit for buying the building.

Choosing the right funding for each piece

Use real estate financing for the property and separate funding for equipment, inventory and operating needs.

Keeping the property loan separate from working capital prevents one problem from becoming two. If you need speed for non-property needs, ROI Funder can match you with options and show total cost, payback period and monthly-equivalent payments. Applying takes a few minutes with a soft credit pull and no obligation. Funding runs from $5,000 to $5,000,000 across all 50 states.

For the property itself, talk to a bank, a credit union or an SBA lender, and review SBA loan requirements.