How to Get a Commercial Real Estate Loan

This blog post has been updated March 2024 for freshness and accuracy

Most investors rely on commercial real estate loans to finance the purchase of a business property or to renovate commercial property. Commercial lenders provide a variety of different loan options, but most have similar requirements for approval.

It’s important to understand the differences in fees, interest rates, and terms for commercial loans as opposed to residential or personal loans.  

What Are the Main Commercial Property Loan Requirements?

While each commercial lending option is slightly different, most rely on the same requirements in order to determine whether a business entity can qualify for funding. 

Property Type

Only profit-producing properties, such as office buildings or storefronts, are qualified real estate purchases for a commercial mortgage. Traditional lenders may approve you for a commercial loan on a primary residence only if it is also used as a rental. 

Property Appraisal

Properties must be assessed by a qualified appraiser. There are three main ways that this is assessed: sales approach, cost approach, and income approach.

The sales approach compares the property to three comparative properties that were sold in the last year based on factors like number of bedrooms and bathrooms. The property’s value is moved up or down depending on these factors to develop an adjusted price.

Cost approach identifies the cost of building an identical property using this formula: cost - depreciation + land value = property value. Depreciation can include things like updating a building to improve the layout or reduced property values due to external factors.

Income approach, also known as the income capitalization approach, divides the net operating income (NOI) by the capitalization rate. There is an inverse relationship between the cap rate and the estimated value, meaning that lowering capitalization increases cost.

For example, if you have a property with an NOI of $50,000 and a cap rate of 8%, the property is valued at $625,000.

A commercial real estate lender relies on appraisals to ensure that they are not providing you with a loan higher than the actual worth of the property. 

Creditworthiness

When you get a commercial real estate loan, you will need to provide proof of your personal income or your business finances through business bank statements, business tax returns, and credit reports.

Commercial mortgages require information about your debt-to-income ratio during the application process, while other loan types only need a credit score.

Property Profitability

Whether you get a commercial mortgage or an investment-specific product like a DSCR loan, you will need to prove the debt service coverage ratio, which divides the rental income by the debt service to determine the property’s profitability.

This proves that your property will have adequate cash flow to pay its debts.

Loan-to-Value Ratio

Loan to value (LTV) ratio refers to how much you are borrowing versus how much the property actually costs, and determines your down payment.

Typically, a commercial real estate lender wants a LTV of 75% or less, which would mean that you need to provide a 25% down payment. However, some will go as high as 85%. 

Down Payment and Closing Costs

Like other real estate transactions, you will need to pay a down payment. This is often higher for a commercial real estate loan because they are riskier for lenders. Closing costs are often higher as well. Budget for at least 25% of the purchase price to be paid upfront.

Where to Get a Commercial Real Estate Loan

Financial institutions like commercial banks are generally the first choice for businesses needing a loan, but there are other lenders that investors can rely on as well. Each has its benefits and drawbacks, and commercial loan rates can vary greatly between institutions. 

Banks and Credit Unions

In addition to residential mortgages, many banks and credit unions provide bank loans and conventional loans.

A bank loan doesn’t necessarily have to be used for commercial real estate. Many businesses may take out a bank loan when they have low cash flow or want to expand operations.

You can get short term loans for only three years or choose one with longer loan terms if you need to borrow a large sum for a real estate purchase.

Commercial conventional loans work like residential mortgages, though they are usually variable rate. You’ll make loan payments as you would with a traditional mortgage, though with a higher interest rate than a residential consumer.

Banks typically require a high credit score like 670 or more, and their processes can be very lengthy, as they are much more risk averse than other lenders. They may not be a good option if you need to close on a property within a short time frame.

Online Lenders

An online lender can provide a larger variety of products than other commercial lenders, such as Debt Service Coverage Ratio loans.

DSCR loans rely primarily on the income-generating potential of the property rather than personal finances, making them a good choice for borrowers with unconventional income streams or who may not otherwise qualify for a loan.

Because these lenders use digital underwriting software, you can usually get a commercial real estate loan much faster through these avenues than through a traditional bank.

Though online business loan companies can be flexible, they sometimes impose penalties should you pay your loan early, so be sure you understand all the stipulations of the loan before signing anything. 

Small Business Administration

Small investors often prefer a small business loan from the government, as they have low fixed-interest rates that help those with low funds expand.

However, they have a lengthy application process and strict regulations on who can apply. You must meet the standard definition for a small business or you’ll be denied.

Like with a loan from a bank or credit union, these aren’t a good option if you need to buy quickly, though they can be helpful if you’re not quite ready to purchase and want to have your funding lined up.

How to Prepare for the Commercial Real Estate Loan Application

Getting a commercial real estate loan requires investigation into your business’s finances, your personal credit situation, and the state of the property. For any commercial loan, you’ll need these documents:

• Personal biographical information (name, date of birth, address, valid government ID, Social Security number)
• Personal credit score
• Business credit score
• Business address, operating type, and EIN
• Two years of personal and business tax returns
• Bank statements
• Profit and loss statements
• Cash flow forecast
• Debt schedule
• Business plan
  

Real estate loans also require some specific information about the property in question, which includes these details:

• Information of all parties involved, such as the development company
• Property deed
• Purchase and sale contract
• Documentation of any liens
• Tax receipts
• Leases and rental agreements
• Proof of insurance
  

When you apply, you’ll fill out the application with your personal and business information, then attach documentation as required. It can take several weeks to get approval depending on the type of loan you’re utilizing. 

How to Increase Your Chances of Getting an Approved Commercial Real Estate Loan

When you’re figuring out the loan process, you must understand that documentation is everything. Though not every lender will require all the documentation listed above, you should have as much available as possible. The more evidence you can provide to prove that you are a trustworthy borrower, the more likely you are to get approved.

Be sure to rehabilitate your personal and business credit before applying by improving your debt-to-income ratio, disputing anything misreported to the credit bureaus, and expanding your available credit through requesting credit limit increases.

Once you’ve lowered your DTI as much as possible, begin saving funds for a down payment. The more you can provide upfront, the more likely you are to be approved.  

Key Takeaways

Like other loans, a commercial real estate loan can be used to purchase property, which is paid back over time through monthly payments. However, the requirements are higher, as are the interest rates and down payment expectations.

Many businesses rely on banks or the government to provide loans, but online lending companies have grown in popularity, given that they provide flexible terms and more loan products.

There are different factors at play for commercial loans as opposed to those for the average consumer, which includes the type of property being purchased, its profitability, and both your business’s and your personal financial status.

Lenders approve purchases based on creditworthiness, property attributes, and the property value. The approval process can be lengthy and complicated depending on who is financing your real estate.

Regardless of what lender you choose, work to improve your personal credit and your business’s financial status before applying. Keep your documentation carefully organized and prepare a dossier of all the information that your lender will require to streamline the process.

It is always better to have the documents available and not need them, as having to continually go back and forth with the lender regarding what documentation is required can greatly delay your approval.

Q: What is a commercial real estate loan?

A: A commercial real estate loan is a loan or mortgage meant to purchase a profit-generating property, such as a residential rental, storefront, or factory. There is both short term financing and long term financing available from lenders, including unique loan types available only for commercial real estate. The requirements for commercial property loans are different than the ones for residential mortgages. 

Q: What are the types of a commercial loan?

A: Commercial loans include conventional mortgages, construction loans, and business loans, such as SBA loans. There are also commercial real estate loans like hard money loans, DSCR loans, portfolio loans, and blanket loans.

Q: What are the main advantages of commercial real estate loans?

A: A commercial real estate loan allows an investor to pay off property using rental income over a period of years or decades. They cover a variety of commercial real estate types, affording investors numerous options in where to invest. Lastly, these loans often have lower interest rates than other business financing because commercial loans require collateral, meaning they are more secure for lenders. 

Q: What is the most common commercial loan?

A: The term loan is the most common loan type. I’s paid back to the originating financial institution through monthly payments over a set period of time. These funds can be used for nearly any legitimate business expense, whether that is buying new equipment or acquiring real estate. 

Q: What is a commercial interest rate?

A: As with a residential loan or residential mortgage, commercial financing requires you to repay the loan with interest. These rates differ based on the type of loan you choose. For example, a short term hard money loan has a much higher interest rate than a Small Business Administration loan, which is backed by the government and has less risk for the lender.

Q: What is a good interest rate on a commercial loan?

A: Interest rates vary widely and are typically higher than the ones of residential loans, but a good commercial loan interest rate is between 6% and 17%. Small business loans can sometimes have rates as low as 2.4%, though this greatly depends on your creditworthiness. 

Q: What is the lowest credit score for a commercial property?

A: Commercial lenders typically have higher standards for a commercial building loan than for residential loans. The minimum personal credit score is around 660, but your lender may set the benchmark at 680 or higher. 

Q: What is the longest term commercial loan?

A: While loan terms average about 10 years for a business loan, commercial real estate loans like a conventional mortgage or DSCR loan can have a loan term of up to 30 years. 

Q: What is the shortest term commercial loan? 

A: Hard money loans have a very short loan term, typically no more than 36 months. Hard money lenders may offer interest-only options, which means that you’ll have to provide a large balloon payment at the end of the loan term to cover the principal. 

Q: What is the best commercial property ROI?

A: For commercial real estate, the highest ROI is generally 12%, while an 8%-10% ROI is considered very good. 

Q: Are most commercial real estate loans fixed or variable?

A: Most commercial real estate loans are variable rate, but an SBA loan is always fixed rate. 

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