Mar
19

How Commercial Real Estate Loans Work- Everything You Need to Know

Acquiring a commercial property for any type of business is a huge commitment. It is not a decision that should be made on a whim without thorough planning. For starters, let us discuss what is a commercial real estate loan?

What is a commercial real estate loan?

Commercial real estate loan is a way to finance an investment on a property meant for business. A commercial real estate loan can also be for property improvement for your own business.

In business, getting a loan is scary since nobody wants to end up being in debt. But with proper planning and having the right reasons to improve your business, you are ready to get a loan.

Advantages of Commercial Loans

Banks will not try to influence how you spend your money

A commercial loan is the best way for you to take full control over how you spend your money. Banks will not try to influence your decisions on expanding your business as long as you pay them back.

They are easy and convenient to access

Most businessmen cannot waste time; ease of access is beneficial for their business. It is easy to get in touch with your bank and ask them about the probability of getting a business loan.

All the profit will be yours

Commercial loans have fixed returns. This means you only have to pay for what you borrowed whether it is big or small. This leaves you with all the profit you have made from the business you have expanded.

Disadvantages of Commercial Loans

Only selected businesses qualify for a loan

There are various requirements you need to apply for a loan and not all businesses meet the criteria. Make sure your business meets the criteria your bank requires so that you will not waste time.

They always insure collateral

Most business loans always secure collateral as a way to make sure the borrower pays off the loan. The business owner may risk their collateral get seized by the bank when they fail to pay for the loan.

The money you have requested may not be completely granted

Banks may not give you all the money you have requested. The bank may believe the business does not need the money that is being requested. It is frustrating to some business owners since they will need to think of another way to cut costs.

Types of Commercial Real Estate Loans

Traditional Commercial Mortgage

Traditional Commercial Mortgage is loans most banks and other lenders provide. They provide you with the money to jumpstart your own business. With any loan you will have to pay off that money with interest or lose the asset you provided.

For this type of loan the asset you gave as collateral will be your own business. If you are unable to pay off that loan they will have ownership of the business you created. That means the building owned by your company goes to them.

Conduit/CMBS Loans

Conduit/CBS Loans has more requirements but is lenient if your credit score isn't great. Conduit Loans bases its business depending on the cash flow of the property. They won't loan money unless they know you have a good chance of paying it all back.

Of course if they see that it's possible to pay back, they are more than willing to negotiate the amount for the loan. Conduit Loans smallest amount for a loan is one million dollars so it has to be something big. You will pay it at a fixed rate until it reaches the final balloon payment which may be double the amount of the rate.

Commercial Bridge Loans

Commercial Bridge Loans are different from other loans they are short term solutions. You use this loan if you are planning to sell business property that might have damage. The loan will help with renovating old properties for potential investors.

The loan is a short term solution so you must pay for it fast. The shortest time for other loans are 5 to 10 years but Commercial Bridge Loans are 6 months to 2 years. The collateral used will also be the business you are renovating.

Soft and Hard Money Loans

Hard money loans are like Bridge Loans but you can only get them from private companies, no banks. Bridge loans have the advantage of low down payments but hard money loans don't have that. A high interest rate and down payment makes hard money loans only useful for emergencies.

Soft money loans are like hard money loans you can get the money fast. Unlike hard money loans you need a better credit score for approval but it has advantages. If you have a high credit score your interest rates and down payment will be a lot less.

Commercial Real Estate Loan Requirements

Security

Before approving the loan, the lender asks for security over the money they are lending. You'll only be able to qualify if you pay 25% or more of the down payment.

Income

They will want to see if you have plenty of income relative to your expenses. It is for the lender to make sure that the borrower will pay back their loan every month.

Credit

In order for you to get approved for a loan, you need a credit score at least of 660 to 680 enough for a regular loan. Most lenders will also want to know if you have been in business for a long time to determine credit risks.

What do lenders look for?

Before a lender will grant the loan, a representative will conduct a background check.

Business Finances

One criteria lender looks for is how the applicant manages the business finances. It is an important aspect because it determines how the business is thriving. If the business finances are on the rock, obviously the lender would not grant the loan application.

Personal Finances

When applying for business or commercial loan, the personal finances are contributing factor. The personal finances must be separate from the business finances. Having sustainable personal finances is a good sign the applicant is able to pay the loan. Income will show what the possible largest amount you can borrow based on how much you make. If you make a lot of money the lender will know that you are most likely to pay it in full with interest.

Property Characteristics

The approval of the loan amount depends on the type of property used as a collateral. If the property has higher market and actual value, it would not be difficult to obtain higher loan amount.

If you are planning to apply for a commercial real estate loan, the best thing to do is ensure that you know the important details required by the lender. Ensure that your business or real estate property is working and sustainable.

By Matt Guenther
Matt is a content writer at Cash for Homes Arizona which provides useful and meaningful information on home buying across in Arizona for the highest cash offer. He has specialized in real estate solutions that assist homeowners with a variety of quick cash solutions for their home.