Commercial real estate loans are financing options that let businesses use property as an investment. They come in different forms and require more qualifying documentation than traditional mortgages.
Typically, lenders will want to see a high debt-service coverage ratio (DSCR), which indicates that the business can afford to repay the loan. They may also require a collateral guarantee, similar to a home loan.
Term Loans
Commercial real estate loans are typically term loans that you repay over a set period of time, with interest. These loans are secured by a lien on your commercial property and function similar to residential mortgages. To determine how much of a loan you can qualify for, lenders will consider the value of your business property, and your debt-service coverage ratio.
Traditional banks and credit unions offer conventional commercial real estate mortgage loans, which have competitive rates but strict qualification requirements. Lenders look at your business history, personal financials and credit score to approve these loans, and may ask for a personal guarantee.
If you’re looking for a less restrictive commercial real estate loan, consider online lenders that specialize in these types of financing. These lenders have streamlined application processes, and can provide funding within a few business days. However, the fast turnaround and flexible terms come at a premium: These online lenders will usually charge higher interest rates than banks or credit unions, and may require additional collateral.
It’s important to remember that commercial property loans are intended for buying, building or renovating a building that houses your business. You can lease out part of your commercial property, but at least 51 percent of the space must be used for your company’s operations. Using commercial real estate loans for investment purposes is generally considered speculative and can put your business at risk.
Business Lines of Credit
Business lines of credit are short-term financing solutions that a business can access as needed. They can range in size from a few hundred thousand dollars to several million. As with other forms of business financing, there are benefits and drawbacks to pursuing this type of funding.
Lenders impose various qualifications for business lines of credit, but many require personal and business credit scores as well as revenues and other financial criteria such as the length of time a company has been in operation. Some lenders may require a guarantor or collateral, such as equipment, vehicles or real estate, to secure a business line of credit.
Many businesses find that it’s important to seek the advice of a financial professional before applying for commercial real estate loans, as these types of financing operate more like a traditional mortgage than other business loans. They’re often secured by the property purchased, which gives a lender a legal claim over the asset in case of default. In addition, many lenders have specific requirements relating to the intended use of the property that must be met to qualify for this type of financing.
Hard Money Loans
Hard money loans are asset-based financing where the borrower posts property as collateral in exchange for funds. Real estate investors and developers use this type of loan because it can be arranged much faster than a mortgage and offers more flexible terms than traditional loans. Private companies and individuals are often the providers of hard money loans. They can be found by doing a quick internet search or asking for referrals from your real estate agent, mortgage broker or other real estate professionals in your network.
The loan process is fast, and approval is based on the property itself rather than your personal credit history. This means you can qualify for a hard money loan even with existing debt or if your credit score is lower than normal. This type of loan is also referred to as a bridge loan because it helps you to bridge the gap between purchasing or improving a property and securing the next stage of financing, such as a commercial mortgage.
Individuals and companies take out a hard money loan because they want to buy a property and renovate it for resale. This can be a great way to make an income as a house flipper or generate cash flow from rental properties. It can also be used as a temporary financing option until you can secure a long-term commercial loan with better terms.
Soft Money Loans
If you’re a commercial real estate investor and are looking for an investment property loan, then soft money loans may be the way to go. Soft money programs offer lower costs and rates than hard money lenders and typically have a longer term of 12-18 months. While hard money loans have fewer requirements, they are more expensive due to higher interest rates and origination fees.
Hard money lenders structure their loans based on the ARV of a property. This means that they don’t weigh the borrower’s credit score as heavily as other lenders do. This allows them to offer more funding and faster closings. This type of financing is popular with property flippers and rehabbers.
Soft money is a new type of lending program that is becoming more popular among first-time investors in the real estate market. Unlike hard money, soft money is more regulated and has better terms and conditions. The main reason why this type of loan is preferred by first-time investors is that it offers a long-term financing option and is easier to qualify for than conventional loans. It is also a great way for new investors to gain experience in the industry. This will help them build their credit and learn the ropes before they can invest in a long-term rental property. The best thing about this type of financing is that it’s available for both residential and commercial properties.