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Get Financing to Invest in Commercial Real Estate

Bigger loans call for substantial collateral. With commercial real estate loans, you secure your loan with the property you own. Learn more right here!

What is Commercial Real Estate?

Man drawing a line graph over a painted skyline.

Commercial Real Estate, or CRE, is one of the most profitable investments that one can choose to make when entering into the world of financing. It is a piece of property that is used solely for business, and Commercial Real Estate can take its form in retail, offices, industrial warehouses, and apartment complexes. Commercial Real Estate Financing can bring several benefits to owners and their businesses as well as carve out a smooth and successful path for a business that is only just beginning.

The Different Types of Commercial Real Estate Loans

Briefly touched on in the introduction, one of the very first things to consider when thinking about diving into the world of commercial real estate financing is what type of business you intend to grow. Unlike a residential loan, commercial real estate properties are intended only for business purposes. These properties can consist of office buildings, retail chains, industrial warehouses, and apartment complexes – as well as special-purpose locations that can include types of businesses like car washes, storage units, and even churches. The most popular types of properties to choose are office and retail, although every single property will bring its unique advantages.

After determining which property you will choose, it’s always best to do a little research into how to acquire a commercial real estate loan.

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 Real Estate Loan

The words “getting a loan” can seem very intimidating at first, but as long as you do your research and take a moment to yourself to learn about the process, a commercial real estate loan can end up greatly benefiting your business. You’ll also find a commercial real estate loan to be easily attainable in some situations.

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

With most commercial real estate 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 owners of the entity 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. Filing as an individual is, simply put, filing as an individual investor. 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 in order to secure the loan.

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

The second step involves evaluating your options with your mortgage and making a decision as to which commercial real estate loan will benefit your company the most and will end up leading to the best exit strategy for the future. It’s important to note that commercial real estate loans are not backed by Freddie Mac and Fannie Mae, two very important 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 two steps that lead to obtaining your commercial real estate loan include calculating your LTV (loan-to-value ratio) to measure and compare the values of your loan to your property, as well as measuring how likely it is that you’ll be able to service any debt that comes from losing your DSCR (debt service coverage ratio.)

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 in turn 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 one that is at least at 1.25%. Anything that is less than one percent shows lenders there is negative cash flow.


Working with a Provider

A handshake happening over a signed real estate financing document.

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

Commercial real estate financing is not the same thing as getting funding to pay for commercial real estate. 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. Remember, the provider will need to look at your business’s finances as well as the value of the real estate you will use as collateral. This takes time.

Commercial Real Estate Loans at a Glance

If you have plans to build a business project or a structure for your company, commercial real estate financing might be a viable option. Here are the main points:

  • The funding amount can be anywhere from $150,000 all the way up to $5 million. Your funding amount will depend on a number of factors. One of the most important factors will be the value of the commercial real estate you put up as collateral.
  • The term is usually around 20 to 25 years.
  • The interest rate for commercial real estate financing tends to be around 4.25-percent to 6-percent. This is low for small business funding, but most other small business financing options would not be a suitable way to fund this kind of project.
  • There are a number of different projects you can use this money for, but your provider will probably require you to use the money to build some kind of structure.

Advantages of Commercial Real Estate

  • Financial Rates – A huge advantage in investing in commercial real estate are the favorable financial rates you’ll ultimately end up receiving. Because rates are low, it’s very easy to save a significant amount of money while you pay the mortgage on your new property. It’s also important to continue to strive to maintain a clean financial profile and to 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 – As you continue to build equity for your property, it will soon become a valuable asset in the future growth of your business. You’ll gain flexibility in how you choose to manage your business, and you’ll also find yourself with a variety of options when you’re ready to retire.
  • 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 concerns of public safety. 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 to be costly. The overall hope here is that the gains you receive in your investment of commercial real estate will outweigh disadvantages that could follow.
  • High-Interest Rates – It’s very common 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 in regards to pursuing a commercial real estate loan are with banks and commercial lenders. Banks will be able to provide commercial real estate 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.

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