What is a Commercial Mortgage?
Commercial mortgages are business loans specifically designed to help individuals and companies finance properties for business purposes. Unlike residential mortgages, which are used for personal homes, commercial loans cater to the unique needs of businesses seeking to purchase or refinance properties for their operations.
These loans differ from traditional residential loans in several vital ways. When considering a commercial mortgage, lenders consider various factors, such as the property’s market value, potential income generation, and the borrower’s ability to repay the loan. This tailored approach ensures businesses can secure financing that aligns with their specific requirements.
Factors Considered
When applying for a commercial mortgage, financial institutions assess different elements before approving the loan. One crucial factor is the property’s market value – this helps determine how much can be borrowed against it. Moreover, lenders consider the collateral borrowers provide as security for the loan. This could include other owned properties or valuable assets that can serve as a guarantee of repayment.
Lenders evaluate an applicant’s ability to repay the loan based on their business’s financial performance and stability. By examining these factors closely, lenders ensure that they mitigate risk while providing necessary financing to support business growth and expansion.
Importance of Collateral in Commercial Mortgages
One crucial aspect that differs between commercial and residential mortgages is collateral. While residential mortgages primarily use the home purchased as collateral, in commercial financing situations, lenders may require additional forms of security beyond just the purchased property.
Loan Costs and Interest Rates
Commercial real estate financing costs include the principal and interest, along with any applicable fees. Interest rates associated with commercial mortgages often vary based on different benchmarks such as LIBOR (London Interbank Offered Rate). The median annual interest rate is typically determined using this benchmark, along with additional considerations like creditworthiness and overall market conditions.
Moreover, when securing a commercial mortgage, borrowers should consider other costs associated with obtaining and servicing the loan. These may include origination fees, appraisal charges, legal fees, and title insurance costs, among others, which contribute towards making up loan costs.
Types of Commercial Real Estate Loans
Borrowers can select from several loan structures to finance acquiring or renovating a commercial property. Some options can help save on the monthly cost, allowing an interest-only payment. However, that would require a large balloon payment at the end of the loan term.
Other options allow for equal monthly payments. The exact conditions depend on the lender and loan type. Available loans to purchase a commercial property include:
- Commercial real estate loans.
- SBA 504 loans.
- Conventional business loans.
- Construction loans.
- Bridge loans.
How do Commercial Real Estate Loans work?
Small business owners have several options for financing a commercial property acquisition or renovation. There are several steps in the process:
- Determine how much you need for the property or properties.
- Find the best loan option for your commercial mortgage.
- Find a commercial real estate lender.
- Ensure you qualify for the lender.
- Apply with the lender.
- If approved, accept the loan offer and get funded.
- Repay the loan per the loan agreement.
Traditional Commercial Mortgage Loans
Some banks and credit unions give loans to businesses for buying commercial property. This is like a home loan but for companies.
The loan is secured using the property as a promise to repay the money. Small business owners need good credit and a long business history to get this loan. If they qualify, it’s the easiest loan to handle. The interest rate is usually between 5% and 7%.
Small Business Term Loan
If you can’t get a commercial mortgage from a bank, you might want to check out term loans. Some online lenders have business term loans. These loans go from $10,000 to $5 million and last 3-10 years. The interest rates start at 5%.
Small Business Administration (SBA) Loans
The US Small Business Administration (SBA) runs the SBA loan program, often considered the gold standard of business financing. The SBA partially guarantees the loans, allowing lenders to offer higher borrowing amounts at lower interest rates and longer repayment terms.
The main SBA loan for commercial real estate is the SBA 504/CDC loan. It provides up to $5 million for commercial property with terms of up to 25 years. You can also use the SBA 7(a) loan for commercial real estate. SBA 7(a) interest rates are usually between Prime + 2.5% and Prime + 4.75%. SBA 504 loan interest rates are usually around 3%.
Bridge loans
A bridge loan is like a short-term money boost to help until you can get a long-term loan. It’s used mainly by real estate investors or small businesses trying to outbid cash buyers. You’ll get a big chunk of money upfront but must pay it back quickly. If you can’t, you’ll need to refinance. The interest rates for bridge loans are usually between 4.2% and 13%.
Hard money loans
A hard money loan is like a bridge loan, but it comes from a private company instead of a regular bank or online lender. The repayment terms are short, and the interest rates are between 10% to 18%. People who can’t get a bridge loan from a lender usually go for a hard money loan.
How do I qualify for a Commercial Mortgage?
Your credit history and financial stability will be thoroughly assessed to qualify for a commercial mortgage. Lenders will carefully examine your ability to repay the loan, ensuring you have a solid track record of responsibly managing debt.
Lenders will evaluate its potential income. They want to ensure that the property can generate enough revenue to cover the mortgage payments and other expenses associated with owning it.
Rigorous Underwriting
The underwriting process for commercial financing is much more rigorous than that of residential mortgages or business loans. Unlike residential loans, where lenders mainly consider personal credit scores and income, commercial mortgages require an in-depth analysis of the borrower’s finances and the business property used as collateral.
When evaluating your application, lenders also consider factors like median interest rates, amortization schedules, and collateral. These details help them assess the level of risk involved in lending to you.
How do I use a Commercial Mortgage Calculator?
You can use the following Commercial Loan Calculators:
- CommLoan’s Commercial Mortgage Calculator
- MortgageCalculator.org.
- Business.org’s Commercial Mortgage Calculator.
- MortgageCalculator.Biz.
A commercial loan calculator is a helpful tool for estimating the costs associated with obtaining a commercial mortgage. By inputting details such as interest rates, amortization period, and loan amount, you can estimate your monthly payments, how much interest is paid over the life of the loan, and other relevant financial information. This allows you to have a clear understanding of what to expect in terms of financial obligations when seeking a commercial mortgage.
Commercial mortgage calculators are especially useful for comparing different commercial financing options. For instance, if you’re considering multiple loan offers from various lenders, using a calculator can help you compare the total costs of each loan, making it easier to choose the most favorable option. These calculators can assist in understanding how changes in variables like median interest rates or amortization periods might impact your overall loan costs.
Impact on Decision-Making
Understanding the potential impact of different variables through a commercial mortgage calculator empowers borrowers during the decision-making process. For example, by adjusting inputs such as interest rates or amortization periods within the calculator, borrowers can see how these changes affect their monthly payments and overall repayment amounts. This insight is valuable when navigating different business loan options and determining which aligns best with their financial goals.
Moreover, commercial mortgage calculators also provide clarity on how certain factors may influence specific aspects of loans — like balloon payments or adjustable rate mortgages — making it easier for borrowers to comprehend complex elements involved in securing commercial financing.
How to apply for a Commercial Real Estate Loan:
You can apply for a commercial real estate loan through our network of lenders using an SBA loan or business term loan. Follow these steps to apply.
Step 1: Ensure You Qualify
You’ll need a personal credit score between 650-700 and a healthy, consistent cash flow. You will also need documentation of the property you’re interested in, such as the address, property type, owner-occupancy ratio, total sale price, plans to renovate, and list of revenue-generating tenants (if any).
Step 2: Gather Your Documents
Be prepared to provide:
- Driver’s License.
- Business license or certificate.
- Voided Business Check (for business bank account information).
- Bank Statements.
- Credit Report/Statement of Personal Credit History.
- Business Tax Returns.
- Credit Card Processing Statements.
- Personal Tax Returns – 3 Years.
- Business Tax Returns – 3 Years.
- Business Plan (Not in all cases).
- Personal Financial Statement.
- List of Real Estate Owned or Business Leases if applicable.
- Debt Schedule/Loan/Rent/Lease Documentation
- Deeds/Title/Ownership documentation for any collateral/Security.
- Current Profit & Loss Statements and Balance Sheet Year-to-Date.
- A/R and A/P Reports.
- United Capital Source 1 Page Application.
Step 3: Fill Out the Application
You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.
Step 4: Speak to a Representative
Once you apply, a representative will contact you to explain the repayment structure, rates, and terms of your available options. This way, you won’t have to worry about surprises or hidden fees during repayment.
Step 5: Receive Approval
Commercial Real Estate Loans through our network generally take 3-5 weeks to process. Once approved and your file is closed, funds should appear in your bank account in a few business days.
If and when approved for a business term loan, funds should appear in your bank account in 1-2 business days.
What are the benefits of a Commercial Real Estate Loan?
Getting a loan for a business property can help small businesses buy the buildings or land they need. This property becomes an asset that adds to the company’s overall value, especially as you pay off the loan.
Owning the place where you do business gives you more freedom to make changes. You can put up signs, add equipment, or make other changes without asking permission from a rental company.
You must use most of the property for your business, but you can rent out the rest for extra money. For example, if you bought an office building, you must use at least 51% of it for your business, but you can rent out extra office space to other companies.
There are lots of lenders and loan options for a business mortgage. You can get a low-cost SBA loan or use an online lender for quick application and fast funding.
What are the drawbacks of a Commercial Real Estate Loan?
Taking out a significant business loan carries inherent risks. If you can’t repay it and default, your business and personal assets could be in trouble.
Most lenders need a significant down payment for commercial real estate loans. You might have to put down 25% of the price or just 10% for SBA loans. Sometimes, you’ll need to add additional collateral or a personal guarantee to secure the loan.
Applying for a commercial loan can be time-consuming, especially for traditional loans. SBA loans are especially known for being hard to get. You need a good credit score, at least two years in business, and high yearly sales to qualify for most loans.
Some small businesses might find it hard to meet these rules. If you don’t get an SBA loan, most commercial real estate loans last 5 to 10 years. But you’ll still owe the rest of the money at the end of the loan.
Commercial Real Estate Loan Pros & Cons
Pros:
- Lower interest rates compared to other types of business loans.
- Longer loan terms allow for more manageable monthly payments.
- Can be used for a variety of purposes, such as purchasing, refinancing, or renovating commercial properties.
Cons:
- Strict eligibility requirements, such as high credit scores and strong financial history.
- A larger down payment is required compared to residential loans.
- Risk of property depreciation affecting the loan’s collateral value.
Frequently Asked Questions
Here are the most common questions about commercial real estate loans and using a commercial mortgage calculator.
What types of Commercial Properties can I finance?
Business owners can finance most commercial properties if they serve genuine business purposes. Here are some of the most widely financed types of commercial properties.
Office Buildings
Business owners can utilize commercial financing options to secure loans for purchasing or refinancing office buildings. Businesses often seek these properties to establish a professional and centralized location for their operations.
Office buildings serve as the headquarters for various companies, offering spaces for administrative offices, meeting rooms, and workstations. With the help of a commercial mortgage, business owners can acquire these properties with tailored financial products from lenders and financial institutions.
Retail Spaces
Retail spaces such as shopping centers, standalone retail stores, or mixed-use commercial developments can also be financed through business loans specifically designed for commercial properties. These spaces cater to businesses that sell goods or services directly to consumers.
By leveraging commercial mortgages, entrepreneurs operating retail businesses can expand their reach by acquiring new locations or optimizing existing ones through refinancing options. The flexibility offered by different types of financial institution products allows them to choose a loan term that aligns with their growth strategies.
Industrial Facilities
When it comes to purchasing industrial facilities, commercial real estate loans can be a valuable financing option. These loans are specifically designed to help businesses acquire or refinance properties that are used for commercial purposes, such as manufacturing plants, warehouses, or distribution centers.
Which lenders offer Commercial Real Estate Loans?
Small business owners have several options for lenders when seeking a commercial mortgage. Here are some lender types to know.
Traditional Lenders
Traditional lenders such as banks and credit unions are common providers of commercial real estate loans. These lenders typically offer competitive interest rates and terms for businesses looking to purchase or refinance commercial properties.
They often require a thorough review of the borrower’s financial history, business plan, and property appraisal before approving a loan. Traditional lenders may also have stricter eligibility criteria than alternative lenders, but they can provide stability and reliability for businesses seeking financing for commercial real estate ventures.
SBA Lenders
When seeking a commercial mortgage through the Small Business Administration (SBA), it’s crucial to consider SBA lenders as potential sources of financing. The SBA approves these lenders to provide loans partially guaranteed by the government, making them more accessible to small businesses.
SBA lenders can include traditional banks, credit unions, and online lenders that the SBA has approved. Working with an SBA lender can provide access to favorable loan terms and lower down payment requirements, making it an attractive option for small businesses looking to secure financing for commercial real estate.
Alternative and Online Lenders
When obtaining commercial real estate loans, alternative and online lenders can provide a valuable and accessible option for businesses. These lenders often have more flexible requirements and faster approval processes than traditional banks, making them a popular choice for many small business owners.
Additionally, online lenders may offer competitive interest rates and terms, allowing businesses to secure the financing they need to purchase or refinance commercial properties. With the convenience of online applications and quick funding, alternative and online lenders can be a viable solution for businesses seeking commercial real estate loans.
How much does a Commercial Mortgage cost?
Several factors come into play. The loan cost is influenced by elements such as the interest rates, loan amount, and amortization period. Lenders carefully assess these aspects to determine the overall expense of a commercial mortgage.
Lenders evaluate the true cost of a commercial mortgage based on the property’s market value and the borrower’s financial standing. For instance, a borrower with a strong credit history and substantial assets may be offered more favorable terms than someone with less financial stability.
Median Interest Rate Discrepancy
The median interest rate for commercial mortgages tends to be higher than that of residential mortgages. This discrepancy occurs due to the increased risk associated with lending for commercial properties. Businesses are viewed as riskier borrowers compared to individuals seeking residential loans.
For example, while an individual purchasing a home may qualify for an interest rate of 3%, a business owner securing financing for their office building might face an interest rate closer to 5% or more. This variance in interest rates significantly impacts the overall cost of borrowing for commercial purposes.
Importance of Debt Service Coverage Ratio
Understanding the debt service coverage ratio (DSCR) is crucial when evaluating the affordability of a commercial mortgage. The DSCR measures a property’s ability to generate enough income to cover its operating expenses and debt obligations.
For instance, if a property has a high operating income relative to its debt payments, it signifies lower risk for lenders and can result in more favorable commercial loan terms for borrowers. On the other hand, if a property’s income barely covers its debts, lenders may impose higher interest rates or require larger down payments due to perceived risks.
What are my alternatives to a Commercial Mortgage?
There are several financing alternatives to a traditional commercial mortgage.
Residential Mortgages
If you’re considering purchasing a property for your business, but commercial mortgage terms and loan costs are not feasible, there are alternatives. One option is to use a residential mortgage for your business property. This means applying for a regular home loan but using the property as a place of business instead of as your primary residence.
Residential mortgages generally have lower interest rates compared to commercial mortgages. However, it’s important to note that using this type of financing may come with restrictions on the percentage of the property that can be used for business purposes.
Business Loans
If neither residential nor commercial mortgages, consider exploring other types of business loans from financial institutions. These lenders might provide more flexible options.
You might be interested in one of the following small business loans:
- Bad credit business loan.
- Business line of credit.
- Business loans for women.
- Equipment financing.
- Invoice factoring.
- Merchant cash advance.
- Revenue-based loan.
- Working capital loans.
- ERTC advance.
Commercial Mortgage Calculator – Final Thoughts
By grasping the qualification process, utilizing a commercial mortgage calculator, and considering the pros and cons, you’re equipped to make informed decisions. Remember, while commercial real estate loans offer significant advantages, they also have drawbacks. It’s crucial to weigh these factors carefully before proceeding.
Now that you have a clearer picture of commercial mortgages, take the next step by exploring potential loan options. Don’t hesitate to seek professional advice or consult with experienced individuals in the industry.
Contact us if you have more questions about commercial real estate loans or to apply for a small business loan. Our alternative funding experts can help you find the best financing options for your business needs.
