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Commercial Real Estate Financing

Collateral is king when lenders look for ways to reduce risk. Nowhere is that more true than commercial real estate financing, which puts your business property under a lien while you pay back the loan. Less risk can mean lower interest rates, longer loan terms, and higher loan amounts, making this a solid choice for a particular type of business owner. Is that you? Let's find out.

What is Commercial Real Estate Financing?

Man drawing a line graph over a painted skyline.

Commercial Real Estate Financing, or a CRE Loan, is a type of mortgage where the loan is secured by your commercial property. CRE is a piece of investment property used solely for business, and it can take its form in retail, offices, industrial warehouses, and apartment complexes.

Different Types of Commercial Real Estate Lending

One of the first things to consider when diving into the world of CRE financing is what type of business you intend to grow. Unlike a residential loan, CRE properties are intended only for business purposes. CRE properties include office buildings, retail chains, warehouses, apartment complexes, and special-purpose locations like car washes, storage units, or churches. Of course, the most popular properties to choose from are office and retail, although every single property will bring its unique advantages.

Maximum Loan Amount

Up to $5M

Loan Term

Up to 25 years

%
Interest Rates

4.25% to 6%

Time to Funds

Anywhere from 30 to 60 days

Acquiring a Commercial Mortgage

There are a few main steps to getting a commercial real estate finance loan. The first involves deciding upon whether you will file your property as an individual or an entity.

With most CRE loans, a property will be filed as an entity, and the loan will be made to corporations, funds or trusts, and limited partnerships. An entity will usually not have a financial track record, which means a lender could require the entity's owners to bestow a guarantee. A guarantee is a promise to pay any debt the investor may have.

Although filing as an entity is the most common, there is also a choice to file as an individual business owner. Something to keep in mind when filing as an individual investor is that your lender will want assurance that all loans can be repaid. The lender will ask for financial track records to be provided to secure the loan.

If starting a new business with no previous credit history, a lender will ask the investor to make a guarantee, or promise, that the loan will be paid back.

Next, evaluate your options and decide which CRE loan option will best benefit the company. It's important to note that CRE loans are not backed by Freddie Mac and Fannie Mae, two essential government agencies. This means higher interest rates could be charged. A commercial real estate loan will also have a set term that could range anywhere from five to twenty years, depending on your financial history.

The final steps include calculating your loan-to-value ratio (LTV) and debt service coverage ratio (DSCR). The LTV will measure and compare the values of your loan to your property. The DSCR will determine the company’s available cash that can be used to pay debt.

An LTV will usually range anywhere from 65% to 80% for a commercial loan. However, it is good to note that a lower LTV can qualify for a more favorable financial rate. This is because a lower LTV will have more stake in a property, which means less risk from the lender's point of view.

It is also important to know that for DSCRs, a lender will usually look for at least 1.25%. Anything that is less than one percent shows lenders there is negative cash flow.

Working with a Provider for a Financing Option

A handshake happening over a signed real estate financing document.

Before a provider decides whether or not to approve you for a secured loan for an investment property, they will often look at your proposed collateral and determine its worth. In these situations, the more valuable the collateral, the better chance you'll be approved for a mortgage loan and the less interest you might end up paying. With CRE financing, you offer your CRE as collateral for your funding. Providers like this type of collateral because the property is generally a safe investment. The interest rate for this type of funding can be comparatively low.

Financing for CRE is not the same thing as getting funding to pay for CRE. With this type of funding, you use real estate you already own as collateral to get money to pay for specific business projects, such as the construction of a structure on your commercial property. This type of funding is risky because if you default on the agreement, you could lose the property that your business is built on.

If you need the money fast, you might be disappointed about how long it can take to get approved for commercial real estate financing or other types of business loans. Remember, the provider will need to look at your business's finances and the value of the real estate you will use as collateral. This takes time.

Advantages of Commercial Real Estate

  • Finance Rates - A huge advantage of investing in commercial real estate is the favorable financial rate you may receive. When rates are low, it's possible to save a significant amount of money while you pay the mortgage on your new property. However, it's also important to continue to maintain a clean financial profile and stay prepared for all circumstances by composing a business plan that will prove the viability of your business.
  • Low Prices - As you start the process of getting your commercial real estate loan, you'll very quickly learn that one of the most appealing factors to investing in commercial real estate are the low prices that you'll pay. Also, your commercial real estate values will appreciate over time, meaning benefits will continue to come further down the road.
  • The Growth of Your Equity - You may be able to build equity and increase the value of the commercial property.
  • An Increase in Cash Flow - You can find even more opportunities for cash flow when it comes to the tenants that live and work on your property. Profits may come in through rental income from your future tenants. This new income will prove to be very beneficial, especially with helping to pay debts on your property and counteracting the costs after your initial investment.

Disadvantages of Commercial Real Estate

  • It's a Major Time Commitment - Having tenants on your property means you suddenly have many more management duties on your hands. Some problems that could arise may involve keeping track of multiple leases, solving maintenance issues, and dealing with public safety concerns. These problems could distract from taking care of your company and distract from its future growth.
  • The Beginning of Building Your Business - As you start to get more and more customers, you'll also find you suddenly have facilities to maintain that can prove costly. The overall hope here is that the gains you receive in your commercial real estate investment will outweigh the disadvantages that could follow.
  • High-Interest Rates - It's widespread to find loans accompanied by high-interest rates. Interest rates of a commercial real estate loan have the potential of being 10 points more than a traditional business loan. However, in general, it's always best to look at all your options and compare. Don't just settle on the first one you find.

The Best Resources for Finding More Information about Commercial Real Estate

The best places to find more information about pursuing a commercial real estate loan are with banks and commercial lenders. Banks will be able to provide CRE financing for many different types of properties. They will also be able to guide you one-on-one throughout the process of gaining that commercial real estate loan. Commercial lenders are financial businesses that are best suited for providing commercial real estate loans to smaller companies. An advantage to commercial lenders is that they offer fast approval and lower prices.

You may even want to look at a loan program online.

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