Real Estate Financing: The Ultimate Guide to Commercial Loans

Real Estate Financing: The Ultimate Guide to Commercial Loans

by Kianny Jimenez Jan 04, 2023

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Table of Contents

  1. Commercial Real Estate: What’s the State of the Market?
  2. Understanding Commercial Loans for Real Estate Financing
  3. Terms To Know in The Commercial Lending Industry
  4. Amortization 
  5. Loan-to-Value Ratios 
  6. Debt-service Coverage Ratio
  7. Financial Business Records: How Credit Influences Commercial Loaning 
  8. Types of Commercial Real Estate Loans and Associated Risks 
  9. Term Loans 
  10. SBA Loans
  11. Bridge Loans 
  12. Business Lines of Credit
  13. Financing Considerations and Fees in Commercial Loan Approvals
  14. Are There Fees or a Down Payment Requirement When Accepting a Loan?
  15. When Is Mortgage Insurance Required for a Commercial Real Estate Loan?
  16. Consult With Wealth Builders 365 for a Biz Credit 365 Plan to Aid Your Loan Approval

Small businesses and startups can benefit from obtaining funds to gain property. Commercial real estate loans help business owners attain property with funding, but getting approval for a loan requires a healthy financial track record. For a start-up, financial credibility can take time to accrue. 

Commercial real estate loans commonly are term loans, SBA loans, and business lines of credit. Depending on a lender’s loan approval factors, there’s plenty to consider when seeking real estate financing. Wealth Builder 365's knowledgeable team helps businesses pave the way to loan approvals with our business credit-building program and financing assistance services

Commercial Real Estate: What’s the State of the Market?

Reviewing the market is one of the first elements to consider when seeking funds for business real estate and how to finance your business ventures. The state of the economy and the opportunity to acquire real estate can differ based on the time of year, property availability, fees, financing costs, and loan approval rates. 

When you’re seeking real estate financing, consider the conditions of the market by researching the following: 

  • Inflation and interest rates based on location
  • The longevity of your real estate acquisition
  • Retail property forecasts 
  • Office building vacancies and opportunities
  • Valuation of a property 
  • Types of mortgages and leverage 

Retaining the funds for real estate financing can help a business succeed, but choosing the right conditions and understanding the important elements of commercial business lending is essential. Whether acquiring more property or owning a start-up seeking funding opportunities in the USA, having the right information and partnering with a  credit monitoring services agency can elevate your success. 

Understanding Commercial Loans for Real Estate Financing

The scope of commercial loans for real estate property varies. Since commercial real estate properties are for business purposes, commercial real estate loans can help acquire funds to develop, construct, and establish an investment property. 

How commercial loans differ from the rest in the lending industry:

  • Commercial real estate loans are typically approved for established business entities, such as corporations, developers, funds and trust accounts, and limited partnerships. 
  • Loans can range from five to twenty years, depending on the amortization (payback) period, which is almost always lengthier than the term of the loan. 
  • Depending on several factors, a loan-to-value ratio (a risk assessment indicator) can fall between the 65% to 80% range.

Business owners can seek commercial loans from available lenders, banks, and independent lending institutions. Additionally, the U.S. Small Business Administration can help with startup funding for small business purposes and provide capital along with insurance companies, pension funds, and investors. 

Terms To Know in The Commercial Lending Industry

Commercial lenders are familiar with industry standards and terms that apply to approval factors, loan types, projected lending value, and other critical elements. Let’s review standard industry terms you may hear when applying for and receiving a lending decision. 


Amortization is an accounting term for assessing any risks associated with lending. This term describes the range of time projected to pay off the loan. For instance, commercial lending is typically extended with a five to twenty-year amortization period. 

This period is generally longer than the term of the loan because it calculates the interests and costs associated with receiving a loan. The loan principle and interest are projected to be paid off in months or years following loan disbursement based on the interest rate. 

Loan-to-Value Ratios 

Another assessment used to determine lending risk is the loan-to-value ratio. Financial institutions and lenders examine this ratio before approving a mortgage loan. The calculation is as follows: divide the total loan amount or outstanding mortgage balance by the property's current appraised value and convert it to a percentage. 

A loan assessment resulting in a high LTV is considered high risk. This doesn’t always mean a lender will deny the loan. However, this influences the approved interest rate, typically higher with a higher LTV ratio. A loan approval with a high LTV may also require borrowers to insure their mortgage. 

Debt-service Coverage Ratio

Debt service coverage ratio, also known as DSCR, is a key measure of a company’s ability to repay loans, accept new financing, and make dividend payments. This is also used in measuring debt capacity, alongside debt-to-equity and debt-to-total assets. 

In the context of commercial lending services, the DSCR compare’s a property’s net operating income to its annual mortgage debt service. In other words, its reviews the company’s payback ability. 

To calculate DSCR, divide the net income by the annual debt service. This result helps lenders determine the maximum loan amount to extend to the applicant. This is the basis of cash flow properties. A low DSCR, less than one, indicates a negative cash flow. 

As a result, loans with a shorter amortization period and properties with stable income may receive approval for shorter loans. For properties with unpredictable cash flows, a higher DSCR may be required for approval. 

Financial Business Records: How Credit Influences Commercial Loaning 

Ultimately, rational numbers are the meat of commercial loans. However, there are other elements to review regarding lenders' vetting process to loan their money to business owners. Not all business owners get approvals for good credit or ratios, as interest rates, terms, and conditions can vary between lenders. 

What lenders generally look for when vetting commercial loan applications: 

  • Business finances: A review of LTV, DSCR, profits, and financial health. 
  • Business credit: The business’ credit score, debts, and FICO business score.
  • Personal finances: A review of a business’ owners' financial health and credit. 
  • Collateralized business loan: Any property or assets that could serve as a guarantee for lenders.

The impact of retaining services from a business credit builder program in USA

  • Expanding credit options such as cash loans, store business credits, vehicle financing, and fleet credit to maintain a vehicle.  
  • Helps to improve your business credit profile for loans, credit cards, and other needs. 
  • Aids in matching your business to the requirements of lenders and credit providers.
  • Personal guarantee for business credit building with an initial trade credit
  • Business credit funding without a personal guarantee requirement 

Whether you own a start-up or an existing business, financial records are an essential part of loan approval applications. A solid track record helps lenders feel at ease with extending credit and loans. Credit monitoring agencies check credit scores and inquiries regularly. If you are deemed financially stable and trustworthy, you may be able to get your loans with a reasonable interest rate. 

Business credit builder services help business owners get on the right track to planning for loan approvals. While building credit can take some time, Wealth Builders 365 remains dedicated to our clients for their financial stability and growth. 

Types of Commercial Real Estate Loans and Associated Risks 

Now that you have an idea of the commercial lending industry, we’ll review the types of loans and associated risks. Sometimes business owners have limited opportunities because of the critical factors lenders use for vetting applicants. In other cases, you may have several options to secure commercial loans and other financial aid in USA

The most common types of commercial real estate loans include the following: 

Term Loans 

Term loans are those whose processes most people are familiar with. In this case, you receive a lump sum of capital that you repay over time. The time it takes to pay off, and the interest rates depend on the agreed loan amount and your loan amortization plan. 

Types of term loans: 

  • 7A Loan
  • 504 Loan
  • Bridge Loan
  • Permanent Loan
  • Mini Permanent Loan

The risks associated with term loans can be an amortization period usually longer than the loan term. Any assets, collateral, or financially binding agreements are risky if you cannot pay what you owe. These loans also vary in interest rates and may require a down payment since you’re obtaining financial solutions from a bank. 

SBA Loans 

Small Business Administration (SBA) loans are backed by government funding. Once approved, lenders have reassurance because this guarantees that a portion of the loan is covered through the government’s payments. The two types of loans are 504 and SBA 7(a). 

Requirements for SBA loan approval: 

  • Located and operating in the United States 
  • A for-profit business 
  • Business owners must have invested equity 
  • Demonstrate a need for financing 
  • Zero debt owed to the US government
  • Business owners cannot be on parole

On your end, this is beneficial because it reduces the amount you owe and potentially lowers your interest rate. These benefits make it an ideal choice for real estate financing. The downside is that you do not qualify or meet the requirements, such as in the case of real estate investors. These loans also cannot be used to cover any and every type of business expense. 

Bridge Loans 

Bridge loans are a type of term loan but are only best for some business financing situations. These loans work as an interim for short-term financing solutions until you can secure permanent funding. Ideally, it provides access to cash for purchasing a property if you are waiting to sell another and the financing has yet to be available.

On the flip side, bridge loans involve high-interest rates and are a temporary solution. There are transactional costs, and there isn’t an accurate way the money is tied back to commercial purposes. However, bridge loans are meant to help bridge the gap between cash flow and alleviate an immediate issue such as a refinancing process. 

Business Lines of Credit

A common type of loan for commercial purposes is a line of credit. In these types of loans, the process is similar to credit cards, and funding can be flexible. Business lines of credit, primarily revolving lines, allow businesses to use and reuse capital respectively. The features can include high funding amounts and higher interest rates than traditional loans. 

Standard terms for business lines of credit include: 

  • You only pay interest for what is borrowed
  • Once you make payments, funds are available for use again 

A downside to business credit lines is that there is no set repayment plan and interest rates are typically really high. Failing to make payments can also tank your business credit. This solution may be best in cases where you have projected costs for projects such as renovations and repairs. 

An important note is that commercial real estate loans, terms, and funding time will vary. Depending on the needs of your business and how you will be operating or using the property, you have to ensure the loan is the right match for your business goals in the long run.

Financing Considerations and Fees in Commercial Loan Approvals

While there are different types of real estate financing options for commercial lending, you should be aware of essential considerations and fees associated with your loan approval. 

Common questions about commercial loan approvals and fees: 

Are There Fees or a Down Payment Requirement When Accepting a Loan?

Commercial real estate purchases are similar to buying residential homes and properties. Commercial lenders require a minimum thirty percent down payment before approving an application. When purchasing a commercial property, your LTV can decrease, influencing your required down payment for loan approval. 

The fees involved add to the overall cost of a loan. The fees are attributed to appraisal, legal, loan application, loan origination, and general service fees involved with the lender’s process. Some costs can be paid upfront. In other cases, lenders set restrictions on prepayment options to preserve their projected yield on your loan advantageously. 

When Is Mortgage Insurance Required for a Commercial Real Estate Loan?

Commercial mortgage insurance is generally not a requirement in many cases. A private commercial mortgage insurance policy guarantees lenders a way to recover the money loaned according to the terms in case a borrower defaults. 

Establishing this coverage for your property is often not required for loan approval. Unless a high LTV causes lenders to require insurance on the property as collateral or a guarantee for lending. A bank or other lender may see this leverage for loan approvals. 

Consult With Wealth Builders 365 for a Biz Credit 365 Plan to Aid Your Loan Approval

Assuring you have the best financial record and conditions to retain a commercial business loan for real estate is essential for your business in the long run. A low credit score doesn’t always mean a low is projected for denial, but higher interest rates and credit issues can influence amortization rates. 

In turn, many lenders can recover collateral assets if a business does not pull through on their end of loan payments. To avoid a bad business venture or accepting a risky commercial loan, partnering with an experienced business credit building service can impact the trajectory of your business ventures.

In addition to Biz Credit 365, a credit repair and finance solution, Wealth Builders 365 offers unique business opportunities in finance. Don’t miss out on valuable investments that can elevate the success of your business and pave the way for wealth opportunities. 

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