Explore the Different Types of Real Estate Loans

ByJonathan WagnerMar. 05, 2019
Your business real estate loan options
Your commercial property can be a large source of growth capital for your small business. Online lenders offer business real estate loans up to $5 million dollars, using the property as collateral for purchase, refinance, renovation or business lines of credit, giving you cash to spare for your everyday business needs.

Finding the right business loan provider and then determining which loan is right for your business are both crucial decisions. The approval criteria for business real estate loans are much more stringent than for consumer mortgages, mostly because of the large loan amounts and multiple owners that many commercial properties have. 

Consider these 3 types of real estate loans for your commercial mortgage:


1. Small Business Administration (SBA) 504 Loan

If you’re a small business owner operating a for-profit company in the United States and you’re looking to purchase property, the CDC/504 loan is worth checking out. There are a few criteria that must be met in order to qualify for this loan program:

  • Your business must not have a net worth exceeding $15 million
  • Your business must have an average net income not exceeding $5 million for the past 2 years

You might be denied for a SBA 504 Business Loan if: 

  • You have too much cash on hand in gross profits
  • You have poor credit or low cash flow

The maximum loan amount obtained through the CDC/504 program is $5.5 million. However, this loan amount is dependent on numerous criteria. Maturity terms are available in 10- and 20-year terms. Interest rates are set at an incremental value exceeding the current 5-year or 10-year US Treasury issuance rate. The loan fee is set at 3% of the financed amount.

2. Commercial Real Estate Loan

Banks and online lenders offer commercial real estate loans for varying amounts. Usually, banks will loan up to 80% of the property’s value and your approval is dependent upon your creditworthiness and key financials concerning the business. These financials include the company’s time in operation, ownership makeup, type of business, and cash flow.

There are 2 main commercial real estate loan types:

  • A fully amortized business real estate loan allows you to make payments of interest and principal according to an amortization schedule. These loans allow for a longer term, typically 10-20 years.
  • A balloon payment allows you to make regular payments each month and then one large payment at the end of the loan term that will cover the remaining principal. This loan has a shorter term. A balloon payment loan typically has a term of just 5-10 years.

3. Commercial Real Estate Line of Credit

A commercial real estate line of credit is used to borrow against the equity of the property you already own, much like a home equity line of credit is a loan against the value of your house. These loans are much easier to obtain than commercial mortgages because you are borrowing against your own property, which already has secure value. There is a personal credit check in order to secure the credit line, but the application process is typically easier than for a commercial mortgage. Various uses for credit lines include rehabilitating a property, purchasing additional properties, renovation, or paying down other business debt.

Summary

With commercial real estate, there are several types of loans you can apply for. The overall idea of business real estate loans is that the loan will allow the property owner further investment in the growth of the business. You'll be able to apply for the SBA's real estate loans if you meet its rigorous requirements, but there are other options out there if you don't. Lenders will consider your business and personal credit score and monthly revenue, as well as your time in business and financial plan for the property or money you are borrowing. The property itself becomes the collateral for this type of loan, so consider the risk if you're uncertain you'll be able to pay back the loan. To learn more about whether a loan or credit line is right for your business, compare the two loan types.