Loans are often necessary for those who are looking to start investing in commercial real estate, but what options are available? If you’re looking for commercial real estate financing, keep in mind that there are three general types of loans, each with its own set of benefits, requirements, and applications. Here, we’ll break down the basics for each type so that you can make a more informed decision as to what type of financing works best for you.
Traditional loans are acquired through the bank and offer low interest rates and average-length terms. Interest rates typically average between 4.75% and 6.75%, and down payments of between 15% and 35% are typically required. Upon application, the bank will assess your credit and business history. A credit score of 700 or higher is desirable, and you will have to have been in business for at least a year in order to be approved. Long years in business and high income will increase your likelihood of securing a traditional loan.
Often, those who are denied by the bank turn to the Small Business Administration, a government entity responsible for getting small businesses the funding they require. Qualification requirements are much stricter than those for a traditional loan and often take longer to approve. The SBA offers two types of loans for commercial real estate: the 7(a), which caters to businesses that have been operating for at least three years, and the DC/SBA 504 loan, which is useful for start-ups. Interest rates vary between 4.64% and 10.25% depending on the type of SBA loan, and down payments are generally around 10%. If applying for a 7(a), make sure your credit score is at least 680. Start-ups will need to show excellent credit and cash flow in order to be approved for a DC/SBA 504 loan.
Private loans, which are also known as bridge loans or hard money loans, are offered by private commercial real estate investors. These loans are not subject to strict regulation, so investors are more likely to be flexible during negotiations. Plus, private loan lenders often approve applications much faster than the bank or the SBA can. However, they have shorter terms, down payments ranging from 35% to 50%, and interest rates upwards of 30%. Private loans are for businesses that need something smaller as quickly as possible. In fact, they’re usually just used as a stepping stone towards a traditional or SBA loan.