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November 10th, 2023 at 11:00 am

Unsure of how to get a commercial loan? We’ve got you covered! Read on to learn everything you need to know about commercial loans.

Loans have become a fact of life. An approved loan application has allowed people to go to school, buy homes, and afford cars. Loans have become even more integral to small businesses and investors, allowing for immense growth and new opportunities.

Getting a commercial property loan can come with its own challenges, but knowing how to properly go about the lending process of buying commercial property can help to open up your world and expand your business. Commercial real estate loans are generally used for purchasing commercial property or renovating existing property. Learn more about how to get a commercial loan below.

What lenders look for

Similar to residential loans, the specific requirements for a commercial mortgage will vary from commercial lender, but most lenders look at three main things: your business’ finances, characteristics of the specific property, and your personal finances.

Your business finances

A commercial real estate loan comes with a lot of scrutiny, and part of that comes from just how risky small businesses are. Many small businesses end up unsuccessful and bankrupt. Banks and other lenders want to make sure that you have a robust cash flow and regular profits. This ensures that you can repay the business loan over the lifetime of the repayment period.

Along with checking your books, lenders will most likely use your company’s debt service coverage ratio, which is essentially your annual net operating income compared to your annual total debt service. Your debt service is measured by the amount of principal that you have to pay as well as the interest on any debts. Ratios of 1.25 and higher are required by most lenders.

Your business credit score can also help a lender determine your ability to pay back the loan amount. An SBA 7(a) loan, for example, requires a minimum credit score of 155. The exact minimum requirement will vary based on the loan and lender, but you still have loan options for even low business-credit scores.

Personal finances

While it may seem strange that lenders care about personal finances for a commercial mortgage loan, lenders still want to look at your personal finances. Checking your personal credit score and financial history gives lenders insight into any past problems you may have had. Defaults, tax liens, foreclosures, and other issues, even on your personal account or credit card, can still point to a high risk. A low personal credit score may also prevent approval for a commercial loan or lead to a higher interest rate or down payment.

It’s also important to note that your small business must be structured and categorized as a business entity. This means that it must be registered as an S corporation or limited liability company. Loans for sole proprietorships would be considered personal loans, not commercial. While this is still a viable option, be aware that defaulting on a personal loan for your business could put your finances at risk.

The property

The property that you are trying to purchase acts as collateral for the loan. This means that, if you default on a payment, the lender can seize the property to make up for it. The lender will attach a lien to the property to allow for seizure if you fail to pay. Most lenders will also require that your business uses and occupies at least 51 percent of the property. If you are otherwise looking at rental properties, you should apply for an investment property loan.

Choosing your commercial loan type

Several types of commercial loans are available. The type you choose might be based on their requirements as well as your specific needs.

Purchase loans

Fairly straightforward, purchase loans go toward purchasing property. Also called a mortgage loan, purchase loans typically come with long repayment terms, often up to 20 years, and they come in large loan amounts.

Construction loan

Construction loans have a much shorter repayment term, often just one to three years. As the name suggests, the loan is mainly designed for construction. Most businesses that get construction loans will use it to build their property and then refinance the loan once the property has been constructed.

Refinance loans

Refinancing with commercial loans generally works the same as it does with personal loans. Refinancing allows you to change your loan to get a lower interest rate and reduced monthly payments.

Hard-money loans

Hard-money loans are based almost entirely on the property value, which makes them particularly popular among investors who want to flip properties. These loans are less reliant on your creditworthiness, but they also tend to come with a high interest rate and shorter loan term. Eligible properties for hard-money loans include storefronts, commercial buildings, and warehouse facilities. The hard money loan cannot be applied to single-family homes, though certain multifamily properties are eligible if your business uses and occupies at least 51 percent of it.

SBA loans

Partially guaranteed by the U.S. Small Business Administration, an SBA loan is offered by banks and private lenders to small businesses. SBA loans can be highly beneficial for acquiring commercial property. These loans come with competitive interest rates, low fees, and long repayment terms. Equipment loans have terms up to 10 years, while repayment periods for real estate last up to 25 years.

If you are a profitable and established business, SBA loans might be your best option. The SBA 7(a) loan is for commercial real estate and offers up to $5 million. The money can go toward purchasing real estate or refinancing existing real estate debt. The SBA 504 loan is another good loan that offers up to $5.5 million for purchasing long-term fixed assets, including facilities, land, and machinery.

Requirements for these loans generally include two years of business history, strong annual revenue, good personal credit score, and up to 20 percent down on the real estate purchase.

Finding the right lender

Choosing the right lender for your commercial property loan can be influenced by multiple factors, and the decision isn’t always mutual; a lender might not approve your loan request even if they seem like the best fit. Different types of lenders have their distinct advantages and disadvantages. Here’s a breakdown:

Lender typeProsCons
Traditional banksOften offer lower interest rate
Possibility of establishing long-term banking relationships
Broad range of financial products
Stricter lending policies and requirements
Longer approval processes
Less flexibility in negotiation
Credit unionsCompetitive interest rates
Personalized, community-focused service
Flexibility with loan terms
Limited commercial loan products
Membership requirements
Might lack infrastructure for large loans
Online/alternative lendersQuick approval processes
Lenient qualification requirements
Flexible terms for diverse profiles
Higher interest rates
Shorter repayment terms
Less personal interaction
Hard money lendersFast approval and funding
Focus on collateral value
Flexible loan structuring
High interest rates
Short loan terms
Could have higher fees
Commercial mortgage brokersAccess to many loan products
Expertise in negotiation
Saves time with multiple options
Fees or commission costs
Potential bias towards lenders
Adds a layer to the process

Evaluating creditworthiness and property criteria for commercial loans

All lenders will evaluate your general creditworthiness to make a decision. This assessment often includes:

  1. Business credit score
  1. Personal credit history
  1. Annual revenue
  1. Debt-to-income ratio
  1. Coverage ratio

For the property in question, commercial lenders typically focus on:

  1. The type of property
  1. Purchase price
  1. Loan-to-value ratio
  1. Operating statements
  1. Rental income

Being aware of what each type of lender offers and requires can not only help you prepare your finances better but can also save you time. If you find you aren’t eligible with one lender, you can streamline your search and focus on lenders that align more closely with your financial situation.

Prepare your loan application

Specific application procedures for a conventional commercial loan may vary, but it’s generally straightforward. You will supply the lender with information about you, your business, and the property that you are interested in purchasing. You will also provide supporting documentation to give the lender a better idea of your business, cash flow, and creditworthiness. This includes:

This is not an exhaustive list of documents, and your lender may ask for more proof and documentation as the application and approval process goes forward. This is also the longest part of the commercial loan process, so be patient and provide the information as soon as possible to save some time. The sooner the lender has everything they need, the sooner you will get approved for a commercial mortgage loan.

Closing on your loan

Expect to wait a long period even after approval. For an SBA loan, the process can take anywhere from 30 days to a few months, from approval to funding. With a long-term financing option, actually getting your funds will take a few weeks to a few months. Short-term commercial real estate financing will take much less time. For example, the SBA Express loan program responds to applications within 36 hours.

Once your application is approved and the process is complete, your lender will close the loan and disburse the funds as necessary. Congratulations! However, keep in mind that you have to repay the loan, generally on a monthly basis. If you need any assistance in the commercial business-loan process, consider consulting Berkshire Hathaway HomeServices California Properties—our unparalleled expertise in the commercial space is just one of the reasons to use a real estate agent

In addition to helping you enjoy all the benefits of owning a home, our team of California real estate agents offers the knowledge, training, and experience to provide you with the tools and information you need to close on the perfect deal for your business. Contact Berkshire Hathaway HomeServices California Properties to learn more about how to buy commercial real estate and loan services.


Ready to start your commercial real estate journey? Connect with a Commercial Specialist today!

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3 Comments

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