What Are Typical Commercial Loan Terms?

There is a major difference between borrowing for a home loan and borrowing for commercial real estate. But what exactly is a commercial real estate loan?

What is a Commercial Real Estate Loan?

Any property that has been designed to make money is called a commercial real estate. And commercial real estate loans are for the purchase or renovation of these properties recognized as owner-occupied real estate. Which means at least 51% of the property must be inhabited by the business themselves. Properties include office buildings, retail centers, industrial warehouses, apartment complexes, etc.

Commercial real estate is not the same as residence and thus, the loans also differ from residential mortgages. Since small businesses have a higher risk factor, commercial loans require more detailed business plans and come under more scrutiny. Whereas, for a residential mortgage, no lender asks anything regarding how you are going to be decorating your living room.

Commercial real estate loans also have shorter repayment terms than residential or home loans do. Where a home mortgage is for 30 years normally, commercial real estate loans have a negotiable range of 5 to 20 years. Because there are shorter terms, the penalties put in place for early payment on these commercial real estate loans are also stiffer. This is to protect the lender’s final take. To get a business loan from a bank is more difficult than from an online lender such as Fora Financial.

However, commercial and residential real estate markets do have one major similarity and that is that no amount of money can help overcome a location that was ill-selected.

Types of Commercial Loans

There are several different types of commercial real estate financing. But the three most important ones to small-business owners are: traditional commercial mortgages, SBA 7(a) loans and CDC/SBA 504 loans.

All three require you to have on-premise occupancy by at least 51% of the business with repayment terms of around 5 to 20 years including business plans.

Traditional Commercial Mortgage Loans

Traditional commercial mortgage loans are not backed by the federal government but these loans have been made strictly between the borrower and the bank. These mortgages do not have a mandated cap but it is up to the lender to decide the maximum loan amount.

This maximum amount is determined to be between 65% to 85% of the loan-to-value (LTV) comparison. The down payment would cover 15% to 35% of the fair market value of the property whereas the interest rates on traditional commercial loans range from 4.7% to 6.75% and monthly payments are reduced over the duration of the loan’s term.

Traditional commercial mortgage loans require you to have a higher personal credit score (700 or higher), they also have fewer years in business, usually just one compared to government backed options that have three or more.

Banks and commercial lenders tend to require high qualification since the government is not sharing in the risk. So if you have a business that is well established and profitable and has a solid credit score, a traditional commercial mortgage would be your best bet.

SBA 7(a) Loan for Commercial Real Estate

In case you have been turned down for a traditional commercial mortgage, the most viable option for you then would be a government backed SBA (Small Business Administration). You might even be required to get rejected for a standard bank loan in order to apply for an SBA loan. The interest rates are typically lower for SBA loans along with the credit score requirements. However, the qualification guidelines for SBA loans are stricter.

The most common SBA loan is the 7(a) with the widest range of applications. The majority of these loans are given to established businesses that need to shore up their operating capital. However, they can also be used by newer enterprises to purchase commercial real estate.

An SBA 7(a) loan requires you to have a credit score of 680 or higher along with three years of business history with the repayment term is typically 10 to 25 years.

Please note that these loans are not made by the Small Business Administration itself but are made by SBA-approved lenders. They can be traditional banks, credit unions or private lenders. These potential borrowers follow the SBA’s guidelines because of which lenders have more faith that if there is a risky party, the loans will be repaid. This makes the lender more inclined to grant these loans, even to risky parties.

Unlocking Opportunities: The CDC/SBA 504 Loan for Commercial Real Estate

The CDC/SBA 504 loan is tailored for acquiring commercial real estate. This unique financing combines two loans: 50% from a bank or lender, 40% from a local Community Development Corporation (CDC), and 10% as the borrower’s down payment. Notably, there is no maximum borrowing cap for a CDC/SBA 504 loan.

As a Small Business Administration loan, the CDC/SBA 504 is government-backed. Borrowers need a credit score of 680 or higher. Additionally, they must align with the local CDC’s public policy and job creation objectives.

While the SBA does not monitor the lender’s loan rates, the CDC sets its own terms. Interest rates for these loans typically range from 3.5% to 5%, alongside a 1.5% processing fee from the CDC.

Designed to promote community development and job growth, this SBA loan expects borrowers to create or retain one job for every $65,000 borrowed. If you own a rapidly growing business but lack cash for a down payment on new property, the CDC/SBA 504 loan can be an excellent alternative to more traditional loans.

What are Typical Commercial Loan Terms?

Can you get commercial loan terms up to 30 years? Yes, it is possible. However, the commercial loan terms you are getting mostly depend on the purpose of the loan and the property that is used as security.

The standard commercial loan terms include 30 year terms with up to 5 years of interest. If it is a standard commercial property (freehold), the terms can be 10, 15, 20 and 25 years. If it is a purpose-built commercial property then the terms are typically 10 to 15 years, although some lenders offer up to 25 years as their standard policy.

The extra repayments are unlimited and there are no fees applied after the fixed period ends. Banks usually insist on principal and interest (P&I) for commercial loans that are under the $1 million blanket.

You can choose to get a longer commercial loan term by buying a standard commercial property or using a residential property as security. This can lead you to secure a loan term of up to 30 years. This is applicable even if your loan-to-value ratio (LVR) is high. In case you do not have a residential property, you can still get 25 year terms with an interest only period.

Next Steps

No matter what type of commercial real estate you need, a loan is available for you. The rise of online lenders and marketplaces provides customizable options to acquire capital easily.

Owner-occupied commercial real estate serves as its own collateral. As a result, interest rates on commercial real estate loans are typically lower than those of other business loans. This makes them an excellent choice for starting your small-business journey. However, it’s crucial to make informed decisions, as real estate investments are significant commitments.

Using a commercial loan calculator can help ensure you make the right choice for your investment. While various small business loans give you a general idea of your loan’s costs, a commercial loan calculator focuses on specifics. It accounts for variables like amortization terms, principal and interest payments, and balloon payments.

With a commercial loan calculator, you can compare lenders and explore different lending scenarios based on loan terms, amounts, and rates.

After you’ve analyzed typical commercial loan terms and found what suits you, consult a mortgage broker. They can help you assess your financial situation and maximize your loan-to-value ratio (LVR) based on that assessment.