How does commercial real estate loan Works?
There are many types of business financing options that might fall under the commercial lending umbrella. Most will have set terms, fixed periodic payments, and rates based on creditworthiness, however, there are different types of commercial loans as well as commercial lenders. For example, some commercial lenders will require the borrower to put up certain assets as collateral, while another commercial bank will require a down payment, while still another financial institution might not require either.
Long-term fixed interest rate “mortgage” loans
Much like its consumer counterpart, this type of commercial mortgage loan allows you to purchase property. A business mortgage or commercial real estate loan, however, can only be used to purchase income-earning property. This includes things like retail shops, office space, hotels, etc.
Long-term fixed interest rate mortgage loans are typically available for 5 to 20 years, with rates between 3% and 12% for approved borrowers. In addition, commercial mortgages typically come with a number of upfront costs including origination fees, appraisal fees, survey fees, etc.
In addition to fees, most lenders will also require borrowers to put down a 20% to 30% deposit based on the total amount of the loan.
Hard money loans
A hard money loan is a short-term loan used to purchase real estate, frequently with the goal of investment. For that reason, this type of loan is most often leveraged by individuals hoping to invest in and flip a property.
Unlike mortgages, these loans are not originated by traditional lenders; instead, funds typically come from private investors—or hard money lenders. Another difference worth noting is that eligibility is typically based on the property value, not the applicant’s creditworthiness. The assumption is that if the borrower can’t make payments, the lender will use the property as collateral, so he or she can take possession of it in case of default—and then selling it to recoup the loan.
These loans are notoriously more expensive than other options, with a variable rate ranging from 7% to 15%, on average. As such, they should be used with caution.
Why use one at all? Despite high-interest rates, they are considered to be a much faster pathway to funding when compared to other real estate loans. And, since they are based on the value of the property and not an applicant’s credit history, they may be easier to obtain in some cases.
Mortgage or real estate bridge loan
Fundamentally, a business bridge loan can be any short-term loan (from a few months to a few years) that provides quick access to funds and is used to “bridge” a gap in expenses. As such, this term is frequently used to refer to a number of lending situations.
In this case, a real estate bridge loan provides the capital necessary to make a commercial real estate purchase without enduring the long-process often associated with long-term business financing, like mortgages. These may come in handy when attempting to take advantage of a real estate opportunity, moving your business, or renovation that will increase the value of your property.
Ideally, bridge loans are repaid quickly when pending capital becomes available. However, in some cases, borrowers will need to refinance their bridge loan through another loan, be it a traditional loan, an SBA loan, or another, more affordable loan.
As the name implies, this type of loan is used to fund new construction or repairs and renovations to existing property. Funds can be used to cover the costs of land or property, materials, and labor.
Unlike other types of commercial loans that provide borrowers with a lump sum of money, a commercial loan is released in increments. Borrowers must usually work within a draw schedule that specifies specific milestones upon which more funds will become available.
Generally, interest rates range from 4% to 12% but vary based on prime rates, type of lender, amount of loan, and the borrower’s creditworthiness. In addition to interest, borrowers who qualify can also expect a variety of fees (like project review or fund control fees) as well as a 10% to 30% deposit requirement, which is based on the total cost of the project.