Long-Term Fixed-Rate Commercial Loans
In this guide, we will cover long-term fixed-rate commercial loans. Suppose you are interested in buying or renovating commercial properties, such as offices, retail, hotels, or apartments, and generating income simultaneously. In that case, you will need a special type of financing: commercial real estate loans. John Strange of Lending Network is a commercial loan officer and explains about long-term fixed-rate commercial loans:
Commercial real estate loans differ from residential mortgages in many ways. They have different terms, rates, requirements, and risks. They also come in various types, depending on the purpose and nature of the property.
In this blog, we will explain some of the basics of commercial real estate loans, such as what they are, how they work, and what factors you need to consider when applying. We will also provide tips on finding the best commercial real estate loan for your needs and goals.
Types of Commercial Real Estate Loans
Real estate loans come in diverse shapes and sizes and are far from one-size-fits-all solutions. Each loan type offers specific terms, rates, and applications. Our goal is to guide you in identifying the most suitable loan options and help you navigate through the complexities, and find the perfect fit for your financing needs.
Long-Term Fixed-Rate Commercial Loans
A conventional commercial real estate loan from a bank or lender operates similarly to a residential mortgage, albeit with broader applications and shorter durations. Unlike the 30-year repayment term commonly associated with home mortgages, commercial real estate loans generally span at most 20 years, often ranging from 5 to 10 years.
Eligibility criteria typically entail a personal FICO credit score of 700 or higher, a minimum of one year in business, and the owners business occupying at least 51% of the commercial property. Initial interest rates typically fall from 4% to 7% for commercial real estate mortgages.
Qualifying for traditional bank term loans can be challenging if your credit history could be better. However, online lenders and marketplaces often offer more flexible eligibility criteria, making them more accessible to a broader range of borrowers.
Variable-Rate Commercial Mortgage Loans
Variable-rate mortgages allow interest rates to fluctuate, potentially impacting your monthly payment based on prevailing market trends. On the other hand, fixed-rate mortgages provide a stable interest rate and payment throughout the loan term, offering predictability and peace of mind.
Pros of Variable-Rate Commercial Mortgage Loans
- Lower interest rates
- Stable monthly payments
- Long-term planning
Cons of Variable-Rate Commercial Mortgage Loans
- Potentially higher closing costs
- Limited flexibility
Interest-Only Payment Commercial Loans
Interest-only payment loans, commonly called balloon loans, cater to businesses anticipating a significant lump sum in the future instead of a consistent monthly cash flow from the onset. These loans require payments solely on the smaller interest portion. In contrast, the complete price becomes due after a relatively short term, typically three to seven years.
Qualifying for traditional bank term loans can be challenging if your credit history could be better. However, online lenders and marketplaces often offer more flexible eligibility criteria, making them more accessible to a broader range of borrowers.
Business owners often utilize interest-only loans to accumulate funds or undertake construction projects for commercial properties, intending to refinance the final lump sum later. This strategic approach allows them to leverage the loan for building or expanding their business ventures while planning for a more favorable financial arrangement upon the loan’s maturity.
Pros of Interest-Only Payment Commercial Loans
- Lower initial payments
- Temporary increase in cash flow
- Potential tax benefits
Cons of Interest-Only Payment Commercial Loans
- Higher overall cost
- Higher payments later
- No equity is being built
Refinance Commercial Loans
Like residential mortgages, business owners often seek the benefits of commercial real estate refinancing loans to capitalize on lower interest rates currently available.
While there are associated fees and costs when refinancing, they are typically negligible compared to the potential savings achieved through reduced monthly payments and overall debt accumulation, particularly when considering the option of a blanket loan, which we’ll explore in detail later on.
Refinancing can enhance cash flow and profitability by facilitating property improvements or expansions within the commercial sector. Moreover, it can be a viable solution for addressing imminent financial obligations, such as the final payment on an interest-only loan. By strategically refinancing, business owners can optimize their financial position and effectively manage their obligations while maintaining a positive profit trajectory.
Pros of Refinance Commercial Loans
- Lower interest rates
- Increased cash flow
- Debt consolidation
Cons of Refinance Conventional Loans
Additional costs involved: Potential prepayment penalty costs from the former lender.
Commercial Hard Money Loans
Unlike conventional financing options, hard money loans are sourced exclusively from private investors willing to assume lending risks based primarily on the value of the underlying commercial property rather than the borrowers creditworthiness.
While many forms of commercial lending offer extended repayment periods spanning several years, hard money loans fall under short-term financing. These loans typically have brief loan terms ranging from 6 to 24 months. The time sensitivity associated with hard money loans often translates into higher interest rates, ranging from 10% to 18%, and additional upfront fees.
Property investors favor hard money loans in the fix and flip strategy. These investors specialize in acquiring distressed properties, renovating or improving them, and swiftly reselling them for a profit. Given the expedited nature of their projects, hard money loans provide the necessary funds within a short timeframe, enabling these investors to capitalize on time-sensitive opportunities.
Pros of Hard Money Loans
- Fast funding times
- Large loan amounts
- Collateral-based
Cons of Hard Money Loans
- High-interest rates
- Short repayment period
- Additional fees
Long-Term Fixed-Rate Commercial Loans: Bridge Financing
A bridge loan is a more lenient alternative to hard loans, featuring reduced interest rates ranging from 6% to 12%, longer repayment terms of up to three years, and a relatively quick approval-to-funding process taking anywhere between 15 to 45 days.
To avail a bridge loan from a bank, business owners typically require a minimum credit score of 650. They must be capable of providing a down payment ranging from 10% to 20%. Bridge loans are particularly favored by short-term investors who engage in property renovations and construction before pursuing a more extensive and more comprehensive refinancing strategy.
These investors leverage bridge loans to bridge the gap between their immediate financing needs and the future refinancing opportunity. By utilizing a bridge loan, they can access the necessary funds to carry out time-sensitive projects, maximize the potential of their real estate ventures, and position themselves for a successful refinancing endeavor down the line.
Pros of Commercial Bridge Loans
- Fast funding
- Flexible borrowing terms
- Potential for refinancing
Cons of Commercial Bridge Financing
- High fees
- Short repayment period
Commercial Construction Loans
Construction loans are designed to finance the expenses of constructing various structures, such as offices, retail spaces, industrial facilities, multi-family rental units, and more. When the underlying land has been acquired before seeking the loan, it can serve as collateral, along with the building materials, for the construction loan.
Typically, construction loan terms span a period of 18 to 36 months, providing sufficient time to complete the construction project. Upon completion, it is common for the construction loan to transition into a long-term mortgage, allowing borrowers to seamlessly transition from temporary construction financing to a more permanent financing solution that aligns with the completed property.
This enables the borrower to effectively manage the repayment process and establish a stable financial arrangement for the extended term.
Pros of Commercial Construction Loans
- Interest-only during construction
- Flexible borrowing terms
- Collateral-based
Cons of Commercial Construction Loans
- High-interest rates
- Shorter repayment period
- Delays restrict capital access
Commercial Blanket Loans
A commercial real estate blanket loan allows businesses to consolidate multiple properties into a single financing arrangement, offering convenience and flexibility. With a blanket loan, companies can merge the financing for various properties, streamlining paperwork and expanding investment opportunities.
For instance, if you have ten properties covered by a blanket loan and choose to sell two, you can do so without facing penalties. The proceeds then can then be reinvested in other ventures. While the benefits of reduced paperwork and increased investment options are appealing, it is essential to consider the drawbacks of blanket loans.
These loansare complex mortgage instruments that can be challenging to obtain. They often come with substantial payments and significant potential penalties in the event of default. It is crucial to carefully evaluate the terms and implications of a blanket loan before pursuing it, ensuring that the advantages outweigh the associated complexities and potential risks.
Pros of Blanket Loans
- Simplifies financing
- Lower admin costs
- Greater borrowing capacity
Cons of Blanket Loans
- Higher down payments
- Hard borrowing requirements
Types of Commercial Real Estate
Commercial real estate encompasses various properties utilized for income generation, including buildings, structures, and land.
When securing loans for commercial real estate, properties with at least 51% occupancy by the owners business enjoy expedited and simplified loan approval processes.
Banks and lenders recognize that when the company has a significant stake in the property, it indicates a higher level of commitment and increases the likelihood of loan repayment. Lets explore some common types of commercial real estate properties.
Long-Term Fixed-Rates Commercial Loans For Apartment Buildings
Apartments, townhomes, and condominiums fall under the category of commercial real estate when they consist of five or more living units. Properties with four or fewer units are not considered commercial but are instead classified as residential. These smaller residential properties can typically be acquired through personal loans, making financing more accessible and aligned with individual financing options.
Long-Term Fixed-Rates Commercial Loans For Office Buildings
Urban business districts are known for housing highly coveted office spaces, which also come with a hefty price tag.
Property prices tend to decrease as one moves further away from these bustling commercial hubs.
This presents an opportunity for startups and businesses to consider alternative locations outside the expensive downtown areas, where they can bypass the higher costs associated with the sought-after central office space.
Long-Term Fixed-Rates Commercial Loans For Retail Buildings
Retail buildings encompass a range of properties, including standalone shops specializing in selling goods. Additionally, larger retail properties such as strip malls, which house multiple small businesses alongside a prominent anchor retailer, and regional malls, which are vast structures hosting numerous stores and multiple anchor tenants, also fall under retail buildings.
Medical facilities
Medical facilities include: Hospitals (24-hour care with large staff):
- Ambulatory surgical centers (specializing in complex procedures)
- Doctors offices (smaller-staffed primary care outlets)
- Urgent care clinics (walk-ins)
- Nursing homes (long-term care accommodations)
Long-Term Fixed-Rates Commercial Loans For Warehouses and Industrial Facilities
Warehouses and industrial facilities are typically situated in outlying areas, offering convenient access for transporting products and materials.
These versatile properties serve various purposes, including heavy manufacturing, light assembly, small-scale and bulk storage of goods, or a combination of these functions.
They provide ample space and infrastructure to accommodate different industrial activities, making them essential for businesses involved in manufacturing, logistics, and storage operations.
Long-Term Fixed-Rates Commercial Loans For Hotels and Resorts
This category encompasses accommodations, including full-service hotels, motels with limited amenities, extended-stay facilities, luxury resorts, casinos, corporate chains, and independent inns. However, it’s important to note that there may be more suitable paths for beginners than venturing into the hospitality industry due to the considerable paperwork and regulatory requirements involved.
Commercial Loans For Land Developments
Commercial real estate developers often use the term taking it to describe the process of land development, which involves transforming
undeveloped land into a viable space suitable for future construction. Land development can yield substantial financial returns with relatively minimal initial investment when executed effectively.
Commercial real estate loans are just one category of commercial loans available in the market. In addition to these, various other types of business loans cater to different financing needs. Some examples of these business loans include the following options.
A term loan, which involves borrowing a fixed amount of money from a bank or lender and repaying it over a predetermined period, represents the basic business loan. These loans can be structured as either long-term, extending up to or exceeding 20 years, or
short-term, with durations as brief as three years. Borrowers make monthly installment payments according to a predefined schedule.
Commercial Loans For Business Lines of Credit
A line of credit in business is quite similar to a credit card that allows you to access funds as needed. You can utilize the available capital whenever required if you have yet to reach the maximum credit limit.
A business revolving line of credit facility allows you to have readily accessible funds for various purposes, such as equipment purchases, investment opportunities, or unexpected emergencies, without needing a separate loan application process.
Lines of credit are particularly advantageous for seasonal businesses that experience fluctuations in their cash flow needs. By having a line of credit in place, these businesses can effectively manage their financial requirements during peak and off-peak seasons, ensuring they have the necessary capital when its most crucial.
Government SBA Business Loans
On certain occasions, the United States government can assist small businesses through its dedicated division, the Small Business Administration (SBA).
The SBA offers many loans with lower interest rates than banks and lenders typically provide. It’s important to note that the SBA does not directly lend money; instead, it collaborates with banks and acts as a guarantor to ensure loan repayment. By partnering with banks and financial institutions, the SBA aims to enhance access to affordable financing options for small businesses.
These SBA loans can be instrumental in supporting the growth and development of small enterprises, providing them with favorable terms and increased chances of loan approval.
Commercial Loans For Equipment Financing
An equipment financing loan could be an ideal solution if your business requires equipment, such as a state-of-the-art drill press, a pre-owned embroidery machine, or even high-priced office software.
With equipment loans, the equipment itself serves as collateral for the loan, providing a potential advantage in securing favorable interest rates compared to other loan types. By leveraging the value of the financed equipment, borrowers may access more competitive rates and terms.
Equipment loans cater to the financing needs of acquiring essential business equipment, allowing businesses to obtain the necessary assets while optimizing their financial arrangements.
Commercial Loans For Invoice Financing
You may be eligible for invoice financing loans if your business frequently issues client invoices. This type of financing allows you to sell your outstanding invoices to your lender, who then advances you a significant percentage of the invoice value upfront, typically 70% to 90%.
Once your customer pays the invoice, you receive the remaining portion minus any applicable fees. Invoice financing provides a valuable solution for improving cash flow, especially when you face delays in receiving payments from clients. By unlocking the funds in unpaid invoices, you can access immediate working capital that can be reinvested in your business operations.
This financial arrangement offers a practical way to bridge the gap between invoicing and the actual receipt of payment, empowering your business to maintain a healthy cash flow position.
Get Qualified and Approved For Long-Term Fixed-Rates Commercial Loans
Regardless of the specific type of commercial real estate venture you’re interested in, suitable loan options are available to support your goals. The emergence of online lenders and marketplaces has expanded the range of customizable financing solutions and avenues for accessing capital.
Its worth noting that owner-occupied commercial real estate holds inherent value as its collateral. This factor contributes to the generally lower interest rates offered on commercial real estate loans than other business loans. This makes commercial real estate loans an intelligent starting point for small business owners, as they can provide an excellent financial foundation for their ventures.
With the abundance of financing options and the potential for lower interest rates, small business owners now have enhanced opportunities to secure the capital they need for their commercial real estate endeavors. The evolving lending landscape allows more tailored and flexible financing arrangements to align with specific business requirements. The team at Lending Network, LLC are experts in all types of commercial lending.
