Big stakes are involved in commercial real estate lending. The money isn’t small, and the contract terms are just as heavy, so rushing the process should never happen.
If you’re a commercial real estate borrower, being unaware of costs, fees, and technicalities could keep draining your account over time. Because this lending isn’t a one-off payment, you’re involved in the process long term.
And even before you get a deal, lenders want detailed financials, property appraisals, and guarantees spelt out in black and white.
No wonder they make you sign a thick set of loan papers. Those pages lock in repayment terms, interest rates, and what happens if payments don’t get made.
It can feel like a lot, but knowing what’s inside those papers before you walk into a deal saves you headaches later.
This blog breaks down the important things borrowers should know about CRE lending so they approach it with eyes open and their paperwork in order. Keep reading.
What is Commercial Real Estate Lending?
Commercial real estate (CRE) lending is borrowing money to buy, build, or refinance property you’ll use for business. Anything that generates income or supports your business can fall into this category, i.e., offices, stores, warehouses, rental apartments, etc.
Since the property itself secures the loan, the lender has a safety net if you stop paying. Suppose you find a $2 million building for your company, but don’t have that kind of cash lying around. With CRE lending, a lender may cover 70–80% of the cost, and the rest you’ll bring as a down payment. You then make monthly payments for a set period, build equity over time, and gain control of the property, instead of paying rent forever.
Types of Loans in Commercial Real Estate Lending
Lenders offer several options in CRE lending, and the right choice depends on your situation. Based on how much money you need, how fast you need it, and how long you plan to hold the property, here are some commercial real estate lending options:
Traditional Bank Loans
Bank loans are the most familiar option. You apply at a bank, and if they approve it after reviewing your financials, you get a lump sum to buy or refinance property. Bank loans generally have lower interest rates than private lenders, but they’re also harder to qualify for since these lenders want strong lines of credit and a healthy cash flow.
SBA 504 and SBA 7(a) Loans
The US Small Business Administration (SBA) backs these loans, so lenders face less risk and can offer more flexible terms. SBA loans are divided into two categories:
- SBA 504 loans are for assets like real estate or large equipment, and you access them with long repayment terms (20–25 years). These have lower down payments, sometimes as little as 10%.
- SBA 7(a) loans are not specific and can be used for real estate, working capital, or refinancing debt.
Although SBA loans take more paperwork and time, they’re great for small businesses that don’t qualify for strict bank financing.
Bridge Loans or Short-Term Financing
Bridge loans are temporary fixes for a borrower’s needs. They’re short-term loans and help you secure a property fast while waiting for long-term financing. But the catch is that they come with higher interest rates, so businesses only use them when they need money fast (like to buy a property before another buyer steps in) or when the plan is to improve a property and refinance it later.
What Borrowers Must Know About Commercial Real Estate Lending
No matter the type of commercial real estate lending you go for, certain caveats stand solid. If you’re borrowing money to start or keep your business running, here are some things to know:
Down Payment is Big
Most lenders want you to contribute at least 20–30% of the property’s value upfront because they need proof that you’re serious about the investment. For example, on a $2 million property, you may need to bring $400,000–$600,000 in cash, so knowing it helps avoid surprises.
Your Credit Matters
When you’re borrowing, lenders will review your business credit and personal credit in detail, unless the lender is ROK Financial, because we don’t need perfect credit to give you an offer. But for other lenders, having strong credit scores and a solid repayment history means better interest rates and easier approvals.
Paperwork is Heavy
Commercial real estate lending expects you to be ready with financial statements, tax returns, leases, property documents, and sometimes even a business plan. Many funding delays happen because borrowers don’t have paperwork ready, so get these documents in order upfront to keep the process smooth and show the lenders that you’re prepared.
Time isn’t Instant
CRE loans take time, and a typical funding timeline is 25–40 days, sometimes longer if the loan goes through a traditional bank. If you need money faster (for example, to secure a property before someone else does), bridge loans or private lending options move more quickly, but at a slightly higher cost. Also, an office building with steady tenants may get approved for higher financing than a retail space that a not-so-successful business needs. That’s the reason warehouses, multifamily apartments, and mixed-use properties are easier to finance.
Costs Go Beyond Interest
Borrowers mostly focus only on the interest rate, but that’s just one part of the cost. Appraisal fees, legal fees, and closing costs can add thousands of dollars to the amount you borrow. So planning for these upfront ensures you’re not blindsided later. Moreover, lenders want to see that your business generates enough income to cover loan payments comfortably. They measure this with the Debt Service Coverage Ratio (DSCR). Simply put, your income must be higher than your debt obligations (ideally 1.2 times or more), and a strong cash flow reassures lenders that you can handle the commitment.
Commercial Real Estate Lending Made Easy
Borrowing money for business purposes means your credit score and history will be scrutinized, especially when you get bank loans. But if your business financials are not that strong and you need cash to keep things running, ROK Financial offers a way out.
We offer loans to small and medium businesses without making credit score the center of it all. We see your business plan and vision to approve a loan and proceed with it fast, so things don’t stay stuck.
Get in touch with us and let’s craft a loan agreement that suits you just right!
FAQs
Here are some FAQs about what borrowers need to know about commercial real estate lending.
Can I use one property as collateral to buy another?
If you have enough equity in the property, lenders may let you pledge it as collateral for a new loan. However, they’ll carefully assess the property’s value, your cash flow, and existing debt before approving.
What happens if I want to sell the property before the loan term ends?
You’ll need to pay off the remaining loan balance at closing to sell it. Sometimes this involves a prepayment penalty, depending on your agreement. Always check your loan terms before listing the property.
Do lenders allow early repayment without penalties?
Some do, but many commercial loans include prepayment penalties or clauses to protect the lender’s interest. It means that paying early could cost extra, so always ask and get it in writing before signing.
