Are you looking to buy, build, or renovate a commercial property in the USA? If so, you will need a commercial real estate loan to finance your project. A commercial property loan in the US is a type of mortgage secure a commercial property. Such as an office building, retail store, hotel, or apartment complex. Unlike a residential loan, a commercial loan typically has higher interest rates. It has lower loan-to-value ratios, shorter repayment terms, and stricter eligibility criteria.
However, commercial real estate loans also offer many benefits, such as generating income from rents or leases, enjoying tax deductions and depreciation. It increasing the value of your property over time. Moreover, there are various types of commercial real estate loans available in the USA. It each with its own features and advantages. In this blog, we will discuss the main types of commercial real estate loans. Which help you choose the best one for your needs and goals.
SBA Loans
SBA loans are loans partially guarantee the Small Business Administration (SBA), a federal agency that supports small businesses and entrepreneurs. These are designed to help small business owners who may not qualify for conventional loans due to a lack of credit history, collateral, or cash flow. There are two main types of SBA loans for commercial real estate: the 7(a) loan and the 504 loan.
- The 7(a) loan is the most popular and versatile SBA loan, as it can be used for various purposes, such as purchasing, refinancing, or renovating a commercial property, as well as working capital, equipment, or inventory. The 7(a) loan has a maximum amount of $5 million, a maximum term of 25 years, and a variable interest rate that is based on the prime rate plus a margin. The 7(a) loan requires a minimum down payment of 10% and a minimum credit score of 680.
- The 504 loan is a loan that is specifically designed for purchasing, constructing, or improving a fixed asset, such as a commercial property or large equipment. The 504 loan is a combination of two loans: one from a certified development company (CDC). Which is a nonprofit organization that works with the SBA, and one from a conventional lender, such as a bank or a credit union. The CDC loan covers up to 40% of the project cost, up to $5.5 million. It has a fixed interest rate that is below the market rate. The conventional loan covers up to 50% of the project cost. It has a variable or fixed interest rate that is determined by the lender. The 504 loan requires a minimum down payment of 10% and a minimum credit score of 680.
The pros of SBA loans are that they have low interest rates, long repayment terms, and high loan-to-value ratios, which make them affordable and accessible for small business owners. The cons of SBA loans are that they have strict eligibility criteria, such as being a for-profit business operating in the USA. It having a tangible net worth of less than $15 million. which have an average net income of less than $5 million. Moreover, SBA loans have a lengthy and complex application process. Which involves submitting a lot of paperwork and waiting for approval from both the SBA and the lender.
Conventional Loans
Conventional loans are loans that are offered by traditional lenders, such as banks, credit unions, or mortgage companies, without any government guarantee or insurance. Loans are the most common and straightforward type of commercial real estate loan, as they have fewer requirements and regulations than SBA loans. However, conventional loans also have higher standards and expectations for borrowers, as they pose more risk for lenders.
- Conventional loans can be used for various purposes, such as purchasing, refinancing, or renovating a commercial property, as well as working capital, equipment, or inventory. Conventional loans have a maximum amount of $5 million, a maximum term of 20 years. Its variable or fixed interest rate that is determined by the lender. Conventional loans require a minimum down payment of 20% and a minimum credit score of 700.
- The pros of conventional loans are that they have a faster and simpler application process, which involves less paperwork and waiting time. Moreover, conventional loans have more flexibility and negotiability, as borrowers can shop around and compare different offers from different lenders. The cons of conventional loans are that they have higher interest rates, shorter repayment terms, and lower loan-to-value ratios, which make them more expensive and less accessible for small business owners.
Bridge Loans
Bridge loans are short-term loans use to bridge the gap between two long-term financing options, such as two conventional loans or a conventional loan and a sale. which are ideal for borrowers who need immediate cash to secure commercial property. It do not have the time or the qualifications to obtain a long-term loan. Bridge loans are also useful for borrowers who want to take advantage of a market opportunity. Buying a distressed property, renovating a property, or flipping a property.
- Bridge loans can be use for various purposes, such as purchasing, refinancing, or renovating a commercial property, as well as working capital, equipment, or inventory. Bridge loans have a maximum amount of $25 million, a maximum term of 3 years. Its variable or fixed interest rate that is determined by the lender. Bridge loans require a minimum down payment of 10% and a minimum credit score of 650.
- The pros of bridge loans are that they have a quick and easy application process, which involves minimal paperwork and approval time. Moreover, bridge loans have more lenient eligibility criteria, as lenders focus more on the value and potential of the property. The creditworthiness and income of the borrower. The cons of bridge loans are that they have very high interest rates, short repayment terms, and high fees, which make them very risky and costly for borrowers.
Hard Money Loans
Hard money loans are loans offer private investors or companies. It is not for institutional lenders, such as banks or credit unions. This is similar to bridge loans. They are also short-term loans use to finance commercial real estate projects. Which do not qualify for conventional or SBA loans. However, hard money loans are more expensive and less regulated than bridge loans. They are based on the value of the property rather than the creditworthiness of the borrower.
- Hard money loans can be use for various purposes, such as purchasing, refinancing, or renovating a commercial property, as well as working capital, equipment, or inventory. It have a maximum amount of $5 million, a maximum term of 2 years. It has variable or fixed interest rate determine the lender. Hard money loans require a minimum down payment of 25% and a minimum credit score of 600.
- The pros of hard money loans are that they have a very fast and simple application process. Which involves almost no paperwork and approval time. Moreover, hard money loans have the lowest eligibility criteria, as lenders only care about the value and equity of the property. They do not check the credit history, income, or assets of the borrower. The cons of hard money loans are that they have the highest interest rates, shortest repayment terms. Its highest fees, which make them the most expensive and risky type of commercial real estate loan.
Conclusion
As you can see, there are many types of commercial real estate loans available in the USA, each with its own features and advantages. The best type of commercial real estate loan for you depends on your needs and goals. The purpose, size, location, and condition of your property, as well as your credit score, income, and cash flow. Therefore, it is important to do your research, compare different offers. It consult a professional before choosing a commercial real estate loan.
If you need more information or assistance with your commercial real estate financing needs. Please contact rdimartinolaw.com We are a team of experienced and knowledgeable attorneys. Which specialize in commercial real estate law. We can help you with every aspect of your commercial real estate transaction. From negotiating contracts to reviewing documents to closing deals. We can also help you with any legal issues or disputes. It may arise during or after your commercial real estate project. We are here to serve you and protect your interests. Contact us today for a free consultation. 📞