Learning the different financing options available can be overwhelming if you’re looking to purchase a commercial property. If you need help securing a loan for your commercial property, there are quite a few avenues you can take. This guide lists all of the major types of business loans for commercial real estate and how you can acquire them.

Commercial Mortgage-Backed Security (CMBS)

A common type of loan to purchase commercial property is commercial mortgage-backed security (conduit loans). Commercial lenders like banks, conduit lenders, or investment banks can offer these loans. Other investors can buy this conduit loan once it is issued so they do not end up on the lender’s balance sheets. As a bonus, how these loans are issued means you can typically get a decent interest rate. CMBS loans are generally fixed-rate loans over five to ten years and can be sold with the property. If the loan defaults, the lender can’t take personal property as leverage.

Commercial Mortgages

Commercial mortgages differ little from residential ones, but interest rates are typically higher. Additionally, payment periods can be as low as five years, shorter than residential loans, which usually start at ten years. Securing a commercial mortgage can be more challenging, as there are strict credit score and income requirements.

Small Business Administration (SBA)

SBA loans are government-backed, so they’re a safe and secure way to borrow money for your commercial property. These loans are subject to specific requirements, such as positive cash flows, a solid need for financing, and no existing debt. If you can secure a SBA loan, you can enjoy slightly lower interest rates. However, traditional real estate investors don’t qualify for these loans. While most people use these loans to fund their businesses, buying commercial property isn’t disallowed.

Bridge Loans

Bridge loans are the solution for a business owner to jump on a commercial property without waiting for mortgage pre-approval and lengthy qualifications. Bridge loans are faster, but they are based on the performance of the asset (in this case, the commercial property) rather than individual credit scores. Profitability must be provable. These loans are interest-only, which means you pay only interest instead of principal for a period.

Construction Loans

Most buyers use a commercial construction loan to construct a brand-new commercial property. Typically, these loans are issued in segments depending on how far along the construction process is (a draw schedule). You only pay interest on the amount issued to you so far, not the total cost of the loan at once. You can use this type of loan to buy land, too.

Hard Money

If you want fast cash without worrying about credit score requirements or paying the principal immediately, then hard money might be a good choice. They’re short-term loans, so they’re usually paid off within one to four years. Collateral is based on currently owned assets, like a car or property. Usually, these loans are interest-free.

Commercial Blanket Loans

A commercial blanket loan will likely apply to business owners who want to buy multiple properties in the same shopping mall or multiple chain locations at once. Instead of buying multiple properties with several different loans, all payments are consolidated into one. Unfortunately, because all of these payments are tied into one loan, you can lose all your properties if you can’t pay any longer, so defaulting is not a good option. Further, selling a single property under this mortgage can be complicated (but not impossible).

Residential Mortgages for Commercial Real Estate

Residential mortgages differ from commercial mortgages due to terms, property size, loan amounts, and who is on the loan. They will likely not qualify for commercial property, but there are a few tricky exceptions.

Combined Residential and Commercial Mortgages

Certain mortgages, such as Fannie Mae Mixed Use, allow you to purchase properties with a mix of residential and commercial sections (think a barber shop on one floor and a home on the top floor). 

Traditional Mortgages

Traditional mortgages may be used to purchase multi-family units of generally four or fewer; larger quantities of units will require a commercial loan. These mortgages could be ideal if you’re looking to start with a real estate investment portfolio or rent out part of your home to tenants.

Nonconforming Loans

Many residential mortgages require the borrower to reside in the property as their primary residence, such as Federal Housing Administration (FHA) or United States Department of Agriculture (USDA) loans. If you plan to rent your home while occupying it, these mortgages may still work. FHA loans, in particular, may still generate real estate income if you want to occupy the property. However, requirements and laws regarding these loans may vary from state to state. Below are some examples of varying requirements.

Arizona

You can purchase a multi-family unit up to four units with an FHA mortgage in Arizona, such as a four-plex. A single-family home has a loan limit of around $500,000 in most counties, while four-unit homes have limits of around $1,000,000. Credit scores usually need to be around 580 but can go as low as 500 in some cases.

California

California has a four-unit purchase limit for FHA loans, too, but the minimum purchase price is much higher in some areas, like San Francisco, at over $2,000,000. In most cases, your credit score can be lower in this state, at around 500.

North Carolina

In North Carolina, FHA loans require a 580 credit score to pay a 3.5% down payment. The down payment requirements jump to 10% for credit scores from 500-579. Single-family home purchase limits can jump to $800,000 in certain areas, and four-plexes can be purchased for as much as $1,500,000 in high-cost areas.

Conclusion

Commercial or real estate investment loans will look different depending on the property size, the number of units, and the type of business you’re purchasing. Commercial construction loans can help you build a property from scratch, while bridge loans or hard money can give you some quick cash if you have the portfolio to back it up. Residential mortgages typically won’t work unless you plan on living in or renting out smaller multi-family properties.

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