Buying residential properties and buying commercial properties are two very distinct purchases. For one, loans to finance these purchases vary greatly. If you are a business owner that is considering purchasing your first commercial property, you will likely need a commercial real estate loan.
There are many options you can take in financing your purchase of a commercial property. But don’t worry, we’ve done your research for you. Here is a complete guide (kind of) for commercial real estate loans.
Types of Commercial Real Estate Loans
Since you are likely a small business owner, we’ve focused on four options that will benefit you the most: (1) traditional commercial real estate loans; (2) SBA 7(a) loans; (3) CDC/SBA 504 loans; and (4) hard money loans.
Traditional Commercial Real Estate Loans
This type of loan is a loan made exclusively between the lender and the borrower. The government does not back this type of loan. As such, there is no mandated loan cap-it is in the lender’s discretion to set a loan ceiling. It is normal for lenders to require a minimum downpayment of 25% of the property’s fair market value and interest rates that range from 4.5 to 6.5%.
SBA 7(a) Loans
If your application for a traditional CRE loan is rejected, don’t worry, there are other options. In fact, a traditional CRE loan application rejection is a requirement in order to apply for Small Business Administration (SBA) 7(a) loans. In this kind of loan, the borrower must have a minimum credit score of 680 and have been running their business for three years. This kind of loan is guaranteed by the government and has a ceiling of 5 million dollars. Interest rates range from 5.25-8.5%.
CDC/SBA 504 Loans
CDC/SBA 504 Loans are similar to SBA 7(a) loans save for the fact that the loan has a mandated cap of 14 million, and 40% of the loan comes from a local community development corporation (CDC). This type of loan normally has interest rates between 3.5-5%, as well as a 1.5% CDC processing fee.
Commercial Hard Money Loans
Commercial hard money loans should always be an entrepreneur’s last option. They are a source of short-term capital that takes commercial real estate property as a collateral-a huge risk. These loans are usually taken out by business owners who need to move quickly in order to take advantage of an opportunity. They are a great option for these types of business owners because they provide capital quickly. Credit scores are less scrutinized since the property itself is the collateral.
As a business owner, financial choices are incredibly important. Make sure to take the time to weigh your loan options. Traditional CRE loans should be your starting point, as the SBA won’t even accept your application without a CRE loan rejection. Hard money loans should always be your last option. Take care, and we hope your business success.