A Beginner’s Guide to Commercial Real Estate Lending

There’s no denying the fact that most people start a commercial real estate business because of the ludicrous and quantifiable Return on Investment (ROI) it offers. That’s the reason it has become one of the most rewarding and profitable business options in the world right now. 

No matter what year we are in, people will need to obtain a finance stream incessantly for earning bread and butter. In the beginning, most entrepreneurs don’t have a huge pool of money to purchase an expensive property in order to start a venture. However, they can get over this hurdle with the help of commercial loans and buy the desired real estate with those funds.

What exactly is commercial real estate lending?

It is a process wherein banks, non-financial companies, and lenders refinance various commercial real estate mortgages and lend funds to qualified borrowers. They provide an immediate cash flow to help companies and individuals acquire any income-producing real estate, purchase heavy & modern equipment, and refinance a commercial mortgage that is used solely for business purposes. The most common examples are retail centers, apartments, hotels, rental houses, office buildings, etc.

Government banks and private institutions proffer business owners with a multitude of commercial real estate loan options. Here are the different types of loans that you choose from to buy a commercial property or refinance the loan:

Types of commercial loans

SBA loans

SBA 7(a) and SBA 504 are two types of this commercial mortgage. Private financial companies and banks sponsor these loans to potential users but are guaranteed by Small Business Administration. The SBA 7(a) is a 25-year fully-amortized mortgage program, whereas SBA 504 starts with a conventional fixed-rate and then automatically converts to a 20-year fully-amortized loan.

Bridge loans

Borrowers can get gap mortgage to meet current obligations of their business, such as cover expenses, finance a project, and pay off the payroll, rents, inventory costs, and other expenses. A bridge loan is also known as swing loan, gap financing, and interim mortgage. It is a short-term loan which can be taken out for a period of 1 month to 3 years.

Hard money loans

To qualify such loans, mortgagors need to list the commercial property as collateral, even if the loan money is used to buy another real estate. Usually, hard money loans are offered by non-bank financial institutions that don't need to meet the same standards as government banks. In most cases, these loans can be easily granted within five to seven days.

These are mostly temporary credits which last for around 12 months, but under certain circumstances can be extended up to two to five years. These mortgages are commonly used to for fix-and-flip projects, real estate investments, renovations of rental properties, and for many other reasons. These loans come in handy when problems such as bad credit history, short sales, and foreclosures strike.

USDA Business and Industry (B&I) loan program

USDA rural development works with various community organizations and financial institutions (both private and government) to assist credit-worthy rural businesses with financial and technical assistance. As similar to SBA loans, conventional lenders offer B&I mortgage but USDA guarantees it. The two main purposes of this program are increasing employment opportunities and business development in rural America.

B&I mortgage must be fully amortized because mortgagors may need to pay additional charges on the total amount of a balloon payment. Loan proceeds can be used for essentially any business purposes, including business acquisitions, constructions, conversions, expansions, and development. In addition to that, the funds can be utilized to cover startup costs and working capital.

Commercial mortgages can be used to

• Fund major capital expenditures;
• Cover operational costs;
• Buy a new real estate, office building, and business;
• Refinance your equity;
• Purchase heavy machinery for your business;
• Pay off a debt;
• Add working capital;
• Cover the construction expenses;
• Debt Refinancing;
• Leasehold improvements;
• Acquire franchise; and more.

Are you planning a new business, but don’t have the sufficient proceeds to buy an office building? If yes, then you can contact an experienced and professional bank or mortgagee who will be lending you loan funds to purchase a commercial real estate. By doing so, you can kick-start your business and fulfill all your dream. Good luck & fighting!

For more information on commercial real estate mortgages, call us on +1 (909) 377-3137 or drop a message at bb@arrowbcd.com.