How to Get a Commercial Real Estate Loan in 5 Easy Steps
It is not uncommon to require additional capital to cover costs as your business grows. Rather than waiting for more working capital, commercial loans for construction and real estate purchases can help you realize your expansion plans sooner rather than later. Learn about the commercial mortgage truerate services.
Finding the right one, on the other hand, can be difficult. Here’s what you need to know about getting a commercial real estate loan in 2022.
What is the definition of a commercial real estate loan?
A commercial building loan is a mortgage or loan used to purchase an existing building, add onto an existing property, or construct something entirely new. Because the property itself serves as collateral, it is a secured real estate loan.
Commercial loans, as opposed to traditional mortgages, are given to businesses rather than individuals. They are also only for property that is intended to generate business income.
Commercial building loans are frequently used to purchase or construct a variety of work-related structures, such as:
- Working environments
- Retail establishments
- Hotels
- Restaurants
- Real estate for multi-family dwellings
- Industrial structures
- And “special purpose” structures.
- Commercial building loans may be the only viable option for purchasing a building if your company manages working capital for various expenses such as rent and growth.
As a result, it is critical to understand what they are in order to take the appropriate steps in order to obtain a commercial real estate loan.
How do I apply for a commercial real estate loan?
The first step in obtaining a commercial real estate loan is to locate the best lender for your company. Following that, you must prepare the necessary details and documentation for the application, which may differ depending on the lender you have chosen.
Obtaining a commercial building loan may be more complicated than other small business loans, but it does not have to be a hassle. Let us go over the steps:
Establish Specific Objectives
The first step in obtaining a commercial real estate loan is to locate the lender who best meets your goals and needs. It is critical that you take the necessary time to conduct the necessary due diligence because some requirements or rates may not be favorable for your specific business.
However, before you begin your lender research, it is critical that you have specific goals in mind. You can establish them by asking yourself the following questions:
- How much capital do I require for a commercial real estate loan?
- What exactly do I need the money for?
- How long will it take for me to repay the loan?
- What is my company’s current financial situation?
- How much collateral (if any) do I need to put up for the loan?
- Is my goal a short-term or long-term commercial real estate loan?
After you’ve answered these questions, you’ll have a better idea of what you’re looking for with this loan. This information will be extremely useful when you begin comparing different lenders in order to find the one that best meets your needs.
Evaluate lenders
The next step in obtaining a commercial real estate loan is to conduct lender research. Examine the types of loans they provide, the interest rates they charge, and the specific application requirements.
With so many variables to consider, conducting this research can be a difficult task. Fortunately, there is a simple way to compare dozens of lenders in just a few minutes.
You can easily connect to our marketplace and compare 75+ lenders to get the best rates, terms, and amounts for your goals with National Business Capital.
Begin the application procedure
When you locate a lender, they will walk you through the application process. During this time, you must provide any financials, paperwork, and property details that the lender requests.
Before making a loan offer, the lender will use this information to determine your eligibility. The process can be time-consuming and requires extensive documentation to demonstrate that your real estate purchase or construction project is a good investment.
Applying through a direct lender or bank may lengthen the process. You may be rejected by a direct, non-bank lender, forcing you to apply through another. Banks, on the other hand, can take weeks or months to review your application thoroughly.
By allowing you to access multiple lenders through a single application, marketplaces save you time and frustration.
One of the main requirements for obtaining a commercial real estate loan is that your small business occupy at least 51% of the building.
The property is considered a rental if you do not occupy the majority of the building. This means you’d have to apply for a loan for an investment property.
How do I obtain a commercial real estate loan?
A commercial real estate loan can be obtained in a variety of ways, including through banks, online lenders, hard money lenders, commercial mortgage lenders, commercial construction lenders, or SBA loans.
Different lenders have different requirements and interest rates. Before applying, consider the benefits and drawbacks of each lender to determine which is best for you.
Banks
Commercial building loans are available from both national and regional banks. Most regional banks will cap loans at $1 million, so national institutions should be considered if you need a larger sum of money.
Banks can provide long-term financing options as well as competitive loan interest rates. They do, however, maintain stringent qualification requirements, making it difficult to obtain financing if you don’t have good credit. In addition, the financing process is notoriously slow.
Online Lenders
Online lenders, also known as finch lenders, are another viable option for obtaining these loans. Unlike banks, commercial real estate lenders typically have a faster and less stringent underwriting process.
It’s also easier to qualify for commercial building loans from an online lender rather than a bank, especially if you’ve had credit problems.
National is an online marketplace that compares various lenders to help you find the best fit for your company’s needs.
Lenders of Hard Money
Short-term loans are frequently used to secure a property that is not yet eligible for long-term financing. Prior to applying for a mortgage, funding may be used to secure a good deal on a commercial property or to make property improvements.
Commercial Mortgage Lender
A traditional mortgage structure is appropriate for purchasing a ready-to-move-in property or refinancing an existing location.
Commercial Construction Lender
A commercial construction lender is another option for obtaining a commercial real estate loan.
This type of loan can be used to pay for equipment and materials for expansion or new construction. It is typically delivered on a “draw schedule,” in which the lender provides funding in smaller increments as the project progresses.
Small Business Administration
These loans, which are available for the purchase of land and buildings, renovations, and new construction, provide generous funding with terms of up to 25 years.
SBA 504 Loan 3.7
A 504 loan is designed specifically for the purchase of owner-occupied real estate and is typically divided into two parts, with one portion coming from a bank and the other from a development company.
Any loan used to directly fund a property purchase or construction project will require a down payment. These payments are based on a property’s loan-to-value (LTV) ratio or a construction project’s loan-to-cost (LTC) ratio.
For example, if you get a commercial mortgage with a 70% LTV, you’ll have to put down 30% of the property’s purchase price. There will almost certainly be additional costs, such as processing and documentation fees, that will be incorporated into the loan’s final cost.
How Commercial Building Loan Repayment Works
Commercial loan terms can range from 5 to 25 years and are structured in a variety of ways depending on your needs. Some are fully amortized, whereas others have shorter term lengths with longer amortization periods and a balloon payment at the end.
Most commercial building loans are not intended to be paid off early, at least not without penalty. After all, lending generates revenue for lenders. A prepayment penalty or interest guarantee may be imposed.
Some commercial building loans include a lockout clause that prevents you from paying off your loan early.
Before you apply for a commercial real estate loan, double-check the details, ask your lender how it works, and read the fine print of your agreement. If your lender is unable to provide a clear answer, you may be better off looking elsewhere.
You’ll also want to know how much any prepayment penalties will be.
What are the primary commercial real estate loan requirements?
The process of qualifying for commercial building financing can be complicated by specific details, such as the type of property for which the loan will be used. If you want to get a commercial real estate loan, you’ll be asked to provide various documents depending on whether you’re buying real estate or need funds for construction.
Real Estate
Typical loan requirements for real estate include:
- Enough net operating income to cover loan payments
- Good credit score or FICO Small Business Scoring Service (SBSS) credit score
- Limited liability or corporate structure
- A good personal credit score and a solid financial history
- Property type and value details, including an appraisal
- Financial documents such as tax returns, reports, business records, cash flow projections, and a business plan
Building
Commercial construction loans also necessitate a significant amount of paperwork. In addition to personal and business financial information, you may be required to provide:
Estimates from the contractor
Project plans
Preformat performance projections for the building
Banks also want to know that a project is proceeding as planned and will most likely require you to provide updates as construction progresses. Building is a high-risk investment, and traditional lenders are wary of funding projects that may not pay off as expected.
Certain factors, regardless of the type of commercial loan, can prevent you from qualifying. If you have any tax liens, recent bankruptcies, or have fallen behind on other payments, you may have difficulty obtaining financing.
Marketplaces have the best ability to find financing in these situations because they are connected with a large number of lenders.
If this is the case, lenders may charge you a higher interest rate or require additional collateral.
Can I get a commercial real estate loan without putting up any collateral?
Almost always, the property itself serves as collateral for a commercial building loan. You may also be asked to provide a commercial guarantee, which holds you personally liable for payment if your business fails. However, in some cases, lenders may accept other assets as collateral.
For example, if your credit score or business financials aren’t in good shape, you may be asked to provide additional collateral. If this is the case, you should be able to use any of the following assets.
Inventory
Product-based businesses and retail stores have been able to use their current inventory as collateral for a commercial real estate loan.
Accounts Receivable
It’s not uncommon for manufacturing or construction companies to have to wait a long time for client paychecks. If your company has any outstanding inventories, you may be able to use them as additional collateral for your loan.
Other common types of collateral include heavy equipment, blanket liens, cash, and investments.
Need Assistance Obtaining Your Next Commercial Building Loan?
Qualifying for a commercial mortgage or construction loan is not always easy, and a poor credit history can make it difficult to secure funding from traditional sources. But don’t let that stop you from taking the next steps in growing your business!