Commercial Real Estate Loans: Financing the Building You Work In

Main types of commercial property financing

The common options are conventional bank mortgages, SBA 504 loans, SBA 7(a) loans used for real estate, and short-term bridge loans.

• Conventional commercial mortgages. Offered by banks and credit unions to borrowers with solid credit and financials.
• SBA 504 loans. Designed for owner-occupied property and major fixed assets, combining a bank loan with a loan from a certified development company. See SBA 504 loans explained.
• SBA 7(a) loans. Flexible and can include real estate along with other uses.
• Bridge loans. Short-term financing to buy or renovate quickly before permanent financing.

Program terms and limits change, so confirm the current details with the SBA or a lender. For a side-by-side view, read 504 vs. 7(a).

Owner-occupied vs. investment property

Owner-occupied means your business uses most of the space. Investment property is leased to others. Many small business programs, including SBA, focus on owner-occupied buildings.

Lenders treat these very differently. For an owner-occupied building, they underwrite your business's ability to pay. For an investment property, they look at the rents the building produces from tenants.

If you plan to occupy part and lease the rest, ask lenders how they classify the mix before you make an offer, since it affects which programs you qualify for.

What lenders look at

Expect review of the property appraisal, your down payment, the business's cash flow, your credit and financial statements, and the property's condition.

• An appraisal and often an environmental review
• Loan-to-value, meaning how much you borrow against the property's value
• Debt service coverage: whether business or rental income covers the payment comfortably
• Business tax returns and financial statements, often for several years
• Personal credit and a personal guarantee

Closing typically takes weeks to months. Our guide on getting a commercial real estate loan covers preparation.

Buy vs. lease: the payback question

Buying makes sense when you plan to stay long enough for equity and stable payments to outweigh the down payment and ownership costs.

Illustrative example: you pay $6,000 a month in rent. Buying a comparable building would require a $150,000 down payment and a mortgage payment of $5,500, plus taxes, insurance and repairs that bring the total to $7,000. Monthly cost goes up by $1,000, but you build equity and lock in your location. If you plan to stay ten years, that may be worth it. If the business might move in three, the down payment may be better spent on growth.

Also consider what the $150,000 would earn if invested in inventory, staff or marketing instead.

How ROI Funder can help around a property move

ROI Funder does not fund real estate purchases. It can fund the equipment, build-out and cash needs that come with moving into a new space.

A new location usually brings costs beyond the mortgage: fixtures, equipment, signage, inventory and a revenue dip during the move. ROI Funder places:

• Equipment financing for kitchen, shop or medical equipment, in 2-7 days.
• Working capital to carry payroll and inventory through the transition, same business day on approved, complete files.
• SBA loans for operating businesses that can wait for the lowest cost.

Requirements: 6+ months in business, $20,000+ in monthly revenue, 500+ FICO.

Preparing your business for a property loan

Organize several years of tax returns, current financial statements, a personal financial statement and a clear down payment source before you shop for property.

Commercial lenders move faster when the file is complete. Before making an offer, gather:

• Business and personal tax returns for recent years
• Year-to-date profit and loss statement and balance sheet
• A personal financial statement showing assets and debts
• Bank statements showing where the down payment will come from
• A summary of how the property fits the business and its expected costs

Ask lenders for a prequalification range first, so you know what price point is realistic. Keep enough cash after closing to cover moving costs and a few months of payments.

When these products are not a substitute

Never use short term or revenue-based funding for a property down payment or purchase. The payback is too long for that kind of money.

Real estate pays back over decades. Short term funding expects repayment within months. Using fast money to buy property creates payments the building cannot support. Use a real estate lender for the property itself and keep ROI Funder's products for the shorter-payback costs around it.