A commercial real estate loan, also known as a CRE loan, is designed to help borrowers with expenses associated with commercial properties. In this article, we’ll explain everything you need to know about commercial real estate loans.

What is the Purpose of a CRE Loan?

Real estate is a major investment and a CRE loan allows individuals to purchase a property they wouldn’t be able to afford on their own. These properties are used for business purposes. The units within a commercial property can be rented out to make a profit. A CRE loan opens up opportunities for real estate investors/developers to increase the number of properties they own.

How Does a CRE Loan Work?

A CRE loan is similar to a traditional mortgage loan in a lot of ways- but there are some key differences:

Loan-to-Value Ratio

Loan-to-Value Ratio or LTV is a metric used by lenders to determine how much they can loan. This is calculated by taking the loan amount and dividing it by the property’s value. A commercial property needs to have an LTV of 75 to 80%. A homebuyer can have an LTV as high as 97% and with some government-insured loans, the LTV can be 100%.

Personal Guarantee vs. Non-Recourse Loans

Both mortgage loans and CRE loans require the property to be used as collateral for the debt. However, sometimes, the lender requires a personal guarantee. Depending on how long you’ve been in business, you may not have the financial track record the lender requires for a CRE loan. In this case, the lender may request a personal guarantee from the owners/principles. This means if the business is unable to repay the debt, you take personal responsibility for the payments.

Types of CRE Loans

There are several different types of CRE loans that you can use to meet your goals, depending on the needs and qualifications of your business.

Permanent loan
SBA loan

SBA 7(a)
SBA 504

Bridge Loan
Line of Credit
Hard Money Loan
Owner Financing

Advantages & Disadvantages of CRE Loans

Commercial real estate loans are ideal in many cases- but there are some disadvantages you need to keep in mind. Here are the advantages versus disadvantages of a CRE loan:

Advantages

Many different options to fit your needs/goals/qualifications
Several term options are available
Repayment terms are flexible
Tax breaks
Equity

Disadvantages

The barrier to entry is high
Approval time is longer than other options
Lenders take on more risk
Upfront costs are high
Loss of capital

Qualifying for Commercial Real Estate Loans

Every lender has their criteria for real estate loans, but there are some questions you should ask yourself before applying:

How much is required for a down payment on a commercial property?
What are the business financial requirements?
Does your credit score qualify you for a low-interest rate?

As you compare lenders, make sure to find out about their qualification requirements to find out if you qualify. Additionally, consider traditional and online lenders. The interest rates are typically higher with online lenders, but their qualification requirements are less strict.  

Qualifications for Commercial Real Estate Loans

Each type of commercial real estate loan will have a different application and approval process. Take the time to familiarize yourself with these requirements so you know that you have everything you need to support your application.

Preparing for Commercial Real Estate Loans

Once you review the requirements of the real estate loan you’re going to apply for, gather everything you need before getting started. The process will go much easier if you are prepared. If you know your credit score is too low to get a good interest rate, work on building your credit before you apply. This can be done by paying down your debt, making loan payments on time, and monitoring your credit report.

Also, make sure that you know how you will pay the loan back. If you can’t make your payments, the lender may seize the property.

Finding the Right CRE Loan

Before applying for real estate loans, take the time to consider all of the factors involved in them. The best loan for you will fit your needs, provide you with the funding you need, and be financially manageable for your business. When you’re ready to move forward in this process, contact First Class Lending. We will be happy to help you get the funding you need.