Commercial real estate loan options for business owners

Commercial Real Estate Loan Options for Business Owners

Published October 17, 2023

By John Connor | Vice President/Commercial Lending | Lincoln Branch

Acquiring a commercial real estate loan is a significant step for business owners looking to expand their operations, purchase property, or invest in real estate. Understanding the various loan options available and their specific features is crucial for making informed decisions.

This comprehensive guide will walk you through the different types of commercial real estate loans and help you choose the one that best suits your business needs.

Traditional Commercial Mortgages:

Traditional commercial mortgages are similar to residential mortgages, but they are specifically designed for commercial real estate. Key features include:

  • Loan Term: Commercial mortgages typically have longer loan terms, ranging from 5 to 25 years, allowing for lower monthly payments.
  • Interest Rates: Interest rates can be fixed or variable and are determined by factors such as creditworthiness, market conditions, and the loan term.
  • Down Payment: Generally, a down payment of 20-30% is required, although it may vary depending on factors such as the borrower’s creditworthiness and the lender’s requirements.

Small Business Administration (SBA) Loans:

The U.S. Small Business Administration offers loans specifically tailored to small businesses. The SBA provides loan guarantees, making it easier for businesses to qualify. Key SBA loan programs include:

  • SBA 7(a) Loans: These loans are versatile and can be used for a wide range of purposes, including commercial real estate purchases. They offer longer terms and lower down payments compared to traditional mortgages.
  • SBA 504 Loans: Primarily used for real estate purchases, SBA 504 loans require a lower down payment (typically 10%) and offer competitive fixed-rate options.

Construction Loans:

If you’re planning to construct a new commercial property, a construction loan is an ideal option. Key points to consider are:

  • Short-Term Financing: Construction loans provide funding during the building phase of a project and are typically repaid through a permanent mortgage once construction is completed.
  • Draws and Inspections: Funds are disbursed in stages as construction progresses. Lenders may conduct inspections to ensure the project is on track.
  • Interest-Only Payments: During the construction phase, borrowers often make interest-only payments rather than principal and interest.

Bridge Loans:

Bridge loans are short-term loans used to bridge financial gaps between two transactions. Consider the following aspects:

  • Timing and Flexibility: Bridge loans help businesses quickly secure a property while waiting for long-term financing or when there is a temporary cash-flow shortage.
  • Higher Interest Rates: Due to their short-term nature, bridge loans generally have higher interest rates. However, they can provide the necessary flexibility during transitional periods.

Hard Money Loans:

Private lenders or investors provide hard money loans and are asset-based, focusing on the property value rather than the borrower’s creditworthiness. Key considerations include:

  • Quick Approval and Funding: Hard money loans have a faster approval process compared to traditional loans, making them suitable for time-sensitive opportunities.
  • Higher Interest Rates and Fees: These loans carry higher interest rates and fees due to the increased risk for lenders.
  • Shorter Loan Terms: Hard money loans typically have shorter terms, usually ranging from six months to a few years.

Choosing the right commercial real estate loan is a crucial decision for business owners. Consider your business needs, financial capabilities, and long-term goals when evaluating the various options available. Consulting with a trusted financial advisor or lender can provide further guidance tailored to your specific situation. By understanding the loan options outlined in this guide, you can make informed decisions and secure financing that aligns with your business objectives. Contact Midwest Bank today to learn more about our commercial real estate loan options.

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