As a small business owner, there is a certain amount of pride in owning a brick and mortar from which to operate your company. But many entrepreneurs find getting financing for commercial real estate can be tricky

In this article, you’ll learn from real business owners about commercial real estate loans to help you jump-start the process. But first, here’s a closer look at commercial real estate financing.

What is a CRE Loan?

CRE loans are commercial real estate loans used to purchase a commercial property or real estate for business use. CRE loans are similar to mortgage loans that fund a personal home.

There are various types of commercial real estate funding options available. The main thing to remember is that the property you buy will be collateral for the loan, with the lender holding a lien until the loan is paid off.

Commercial real estate financing can fund many property types, including office buildings, retail space, restaurants, medical office buildings, or any building from which you operate a business. CRE loans can also be used to refinance business debt.

CRE lending can’t be used to purchase residential real estate unless the property will be used as rental income, such as in the case of multifamily housing.

How do commercial real estate loans work?

When a borrower applies for a CRE loan, the lender will examine certain underwriting criteria to determine whether or not to approve the loan. You can apply for your commercial real estate loan through a traditional or online lender.

A traditional lender like a bank or credit union will have more stringent requirements for loan approval, while an alternative lender like an online lender may be more flexible.

CRE loans typically have a fixed rate with equal monthly payments throughout the amortization period.

Your downpayment, creditworthiness, and other lending criteria will influence your commercial real estate loan rate. You should also be aware that some lenders charge an origination fee of 0.5% to 1% on CRE loans.

Generally speaking, shorter repayment periods and short-term financing will have lower interest rates. Meanwhile, longer repayment periods usually mean a higher interest rate for your CRE loan.

Commercial Loan Requirements and Criteria

CRE loan providers review several commercial loan requirements before lending money to borrowers. These include:

• Your credit score: Banks will have stricter credit score requirements while alternative lenders will have more relaxed underwriting rules.
• Tax returns: Most lenders require the last three to five years of returns.
• Financial statements: Banks typically require several financial disclosures during the loan application process, including a cash flow statement, profit and loss statement, and balance sheet.
• Downpayment and Loan to Value (LTV) ratio: The downpayment required on a CRE loan varies from lender to lender. CRE loans usually have a loan-to-value (LTV) ratio of 65% to 80% of the property’s value. This means if the property valuation comes in at $200,000, the lender will loan up to $160,000, and you may have to come up with the rest as a down payment. Most lenders prefer a down payment ranging from 10% to 30%. The higher the down payment, the more favorable your commercial real estate loan terms will likely be.
• Debt service coverage ratio: Many lenders will examine the commercial property’s debt service coverage ratio or DSCR. This is found by taking the property’s net operating income and dividing it by the debt service payments over a year. For example, if you own a small apartment complex with a net operating income of $300,000 and your debt payments over a year were $200,000, your DSCR would be 1.5. Many lenders are more likely to approve a commercial real estate loan with a DSCR of at least 1.25.
• Quality of the collateral: Lenders will also scrutinize the real estate as part of their risk management to determine if it’s a good investment. If it’s a quality piece of collateral they feel will help them recover their losses in case of a default on the loan, it will weigh in favor of approving the loan.

Commercial Real Estate Financing Options

As a small business owner, you have several CRE loan options available. It’s important to find the one that works best for you.

A commercial real estate loan can finance an existing commercial property you want to purchase or fund a new commercial construction project where you build your brick-and-mortar from the ground up.

You can also leverage a CRE loan to finance an income-producing property you want to lease to other small business owners or tenants.

Here are some of the more common ways to seek commercial real estate financing:

Traditional Banks and Credit Unions

Banks and credit unions are the traditional way of getting a commercial real estate loan. In recent years, banks have toughened their lending standards. As such, traditional loans are harder to qualify for and require strong credit histories. As many borrowers have learned, their underwriting process, like that of the SBA, is exhaustive and typically takes longer than many small business owners would like.

SBA Financing

SBA loans are backed by the U.S. Small Business Administration (SBA) and underwritten by approved SBA lenders. There are two primary types of SBA loans for commercial real estate, each offering loan amounts up to $5 million. These loans include the 504 loan and an SBA 7(a) loan. Interest rates are usually higher with an SBA 7(a) loan than a 504 loan. SBA 7(a) loans usually work better for small business owners. However, the SBA loan application process is notoriously time-consuming.

Online Lending Marketplaces and CRE Loan Brokers

Online commercial real estate loans are growing in popularity as entrepreneurs seek more uncomplicated and streamlined ways to fund their ventures. Some online CRE brokers and marketplaces can also get your CRE loan approved much faster than the SBA or a traditional lending institution.

Lessons Learned by Small Business Owners About CRE Loans

As you can imagine, business owners learn many lessons while negotiating business deals and attempting to secure commercial mortgage loans.

Here are some takeaways when it comes to CRE loans.

Lesson #1: Look for a funding provider who can provide faster funding

Unfortunately, bank and SBA loans weren’t created for business owners who want to begin building their company right away, as Dr. Ravindra Gautam of the Gautam Medical Wellness Center learned.

Dr. Gautam and his physician-wife successfully built a small practice in their community. But at one point, they wanted to branch out and expand their practice by adding more physicians and satellite locations.

 Unfortunately, the California area where they practice has a shortage of available real estate, meaning they had to move fast to seize an opportunity when prime real estate became available. However, banks moved too slowly, and any property the Gautums were interested in was purchased quickly by other buyers who could quickly fund their venture.

The Gautums learned the hard way that fast funding was the way to go so they didn’t miss the next opportunity. The next time they had an opportunity, they went with an online provider that offered fast funding and received their CRE loan funds within 48 hours of applying.

The lesson is that sometimes a business owner needs to leverage faster funding channels when it makes sense.

Lesson #2: Develop a working relationship with a CRE financial institution

After owning and operating several restaurants and pizzerias over the past several years, Ray Anzola learned it’s important to have a financial partner by your side every step of the way.

Ray found a flexible financing plan to access more funds as needed for future projects, whether for real estate or working capital. That way, he doesn’t have to reapply for a business loan every time his business needs money.

His latest focus has been spent on renovating his older restaurants. Ray learned that when you have the funds you need, everything else falls into place, and you can move more quickly to get things done.

He advises other small business owners to get fast funding so that they have fewer disruptions in their business’s operations.

Lesson #3: Not all financial platforms are created equal

Raza and David Bolos learned this the hard way. They began searching for a commercial real estate loan provider to borrow money to open their own kolache bakery in Colorado.

They knew an online funding provider was the way to go as they would likely get their money faster. But as Raza searched for the right financial partner, she noticed interest rates varied. She also had questions, but many online lenders avoided answering her questions, leading Raza to feel a lack of consideration for her business needs.

When she discovered Biz2Credit, it was apparent they valued her time. She called them, and they guided her on the fastest process to get the funding needed for their bakery venture.

And the rest, as they say, is history. She advises finding an online loan provider you trust who will offer financing terms you can manage.

FAQs about Commercial Real Estate

What other commercial loan types are there besides CRE loans?

Commercial lending encompasses lines of credit, bridge loans, term loans, revenue-based financing, and working capital loans.

Who does the SBA consider for a commercial real estate loan?

The SBA only loans for operating, for-profit small businesses in the U.S. An SBA borrower must be able to demonstrate they can pay back the loan, be creditworthy, and not be able to secure a loan with reasonable terms from a non-government financial institution.

What is a typical interest rate on a CRE loan?

Commercial real estate loan rates can vary depending on the market. Commercial interest rates today are higher than they were a couple of years ago due to higher Federal Reserve rates.

How long will a lender give me to pay off my commercial real estate loan?

Lenders vary in repayment terms for CRE loans. Some allow as little as three to five years while others allow up to 20. Financial institutions will consider their commercial loan requirements, your credit score and financials, how much down payment you have, the location of the commercial property, and your business plan.

What type of credit score is needed for a CRE loan?

Many lenders will only consider credit scores of 650 or higher. However, online funding providers work with several loan providers and can often find lenders who work with borrowers that have lower credit scores.

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