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Requirements for commercial real estate loan

On Behalf of | Jun 5, 2020 | Commercial Real Estate

Small business owners who are looking to own commercial real estate may be making a good investment over renting, but it is important to understand what a loan entails. A commercial real estate loan differs from a residential loan in a variety of ways. 

Owners should explore the options available and understand the terms so they do not get into financial trouble down the road. 

Details about commercial loans 

According to Huffpost, business owners can apply for a real estate loan through various banks, credit unions, life insurers, security lenders or the Small Business Administration. One thing owners should be aware of is these types of loans usually require a higher down payment than for residential loans. Down payments may range between 20 and 30% of the property’s price. 

A commercial real estate loan may be an amortized one, which includes regular installments, or it may be a balloon loan. With a balloon, there are fixed payments for a period of time, and then the lender requires a large sum to pay the remaining principal. The interest rate for the loans are also often higher than residential, and there are numerous upfront fees. 

Small Business Association loans 

If businesses qualify, the best way to get a commercial real estate loan may be through the Small Business Association. According to the SBA, the 504 Loan Program applies for businesses whose net profits are less than $2.5 million and net worth is less than $7 million. 

Unlike other commercial loans, the 504 program requires a down payment of only 10%. The loan also has a fixed rate over a period of 10 or 20 years. The interest rate is also lower than for conventional loans.