Details of Commercial Real Estate Loans

It’s easy to get overwhelmed trying to understand the many kinds of loans and which will be the best one to accelerate your business. Here are the three main parts of a commercial real estate loan to understand so you can make a smart decision.

Interest Rates

This may be the first number that pops out as you look at a loan, and of course, the lower, the better. Since a small business will have less history and higher risk, there is no way to get around the fact that the interest rate for a commercial loan will be higher than that for residential. Still, there are factors that affect how high that rate has to go.

The primary consideration is the type of lender you use. You will be more likely to get a great rate from the SBA if you meet the requirements and process all the necessary paperwork. Banks and USDA loans hover toward the middle of the spectrum. A hard money loan should always be a last resort as it is the strictest and most expensive option.

In any case, lenders will look at the type of property to figure your rate. This will be considered along with the loan-to-value ratio. They will also want to see how your business is doing by examining its credit history. 

Loan Terms

How will you be expected to repay and on what schedule? Will it be long-term or intermediate? What you choose depends on your needs and how quickly you can pay it off. You also want to think carefully about whether to get an amortized or balloon loan.

A balloon loan is usually for five to seven years. You will pay in fixed installments, but they don’t fully amortize throughout the loan. Instead, you will pay off the bulk of the principal at the very end; hence, like a balloon, the last payment dramatically expands. This can be useful if you will have a lot of capital at that point. On the other hand, an amortized loan is typical for long-term loans, paying a fixed amount regularly over time.

Closing Fees

Closing fees often trip many borrowers up as they forget about this necessary part of the process. Ask about these fees so you can budget for them. If it will be hard to cover these costs upfront, see if you can have them bundled into the payment.

A commercial real estate loan can be a great tool to advance your entrepreneurial interests. Evaluate what you can do to get the best deal on one.