How Do Commercial Real Estate Loans Work?

How Do Commercial Real Estate Loans Work?

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Those ready to jump into the world of commercial real estate may find one simple thing holding them back: financing. Unless you have cash on hand to purchase a commercial property outright, it can be difficult to come up with the funds on your own. Commercial real estate loans are the solution for many involved in this area of real estate, providing buyers with the opportunity to invest without having to sacrifice more than necessary.

Figuring out the right loan for your needs as well as the intricate ins and outs of the application process can make your head spin. It’s important to really understand what’s included in choosing, applying for and completing a commercial real estate loan, before getting started.

What Is a Commercial Real Estate Loan?

Similar to a residential real estate loan, a commercial real estate loan is a financing option in which a lender provides the funds to purchase a property, which the borrow then pays back in small payments over time, with added interest. Unlike a residential loan, however, commercial loans are granted to business entities rather than individuals. The lender secures the loan by placing liens on the commercial property to ensure that the borrow repays the debt.

In most cases, a commercial real estate loan requires a down payment, just like a traditional real estate loan. The amount required for the down payment is determined by the lender and the loan program, but it typically falls between 20 and 30 percent of the purchase price. There are some instances in which businesses may get commercial loans with no money down, depending on the financing method. This may include a hard money lender, an investor partner or a purchase money mortgage.

Common Terms and Repayment Schedules

The term length of a commercial real estate loan will depend on the lender, but they usually range from five to 25 years. There are two common types of commercial loans: intermediate-term and long-term. Intermediate-term loans may have terms of three years or less, while long-term loans have more traditional term lengths, up to 25 years.

The repayment schedule of a commercial real estate loan may fall under either an amortized or balloon repayment. Amortized is the more common type, where the borrow repays the loan in fixed installments until it is repaid in full, plus interest. A balloon repayment is a little different, in that it is repaid in fixed installments until the end of a set term, at which point the borrower must complete the repayment in one lump sum.

Interest Rates

The interest rates connected to commercial real estate loans tend to be higher than other types, including residential. This is due to the higher level of risk that a lender takes on in commercial real estate dealings. As such, it’s important to consider the loan type and the term length if you want to make your interest rate as low as possible.

Trying to find a commercial real estate loan can be complicated, and most businesses turn to professionals with experience in the industry. When you’re ready to get started, let a pro walk you through the process so that you get the right loan for your specific needs.

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Daniel Radcliffe

About the Author: Daniel Radcliffe

As a marketing strategist and dedicated writer for Business Wave, Daniel Radcliffe devotes his skills to researching, developing and positioning content related to some of today’s most cutting-edge technologies. He draws on nearly a decade of marketing, education and technical writing experience to distill complex topics into highly practical and valuable resources for today’s IT leaders.

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