Commercial real estate loans empower businesses to purchase, develop, or expand property holdings, driving business growth and financial stability. Unlike standard loans, these loans are designed specifically for commercial properties, each type suited to different needs and financial situations. 

Loans vary widely in commercial real estate loan terms, interest rates, and repayment structures. In this blog, explore the different types of commercial real estate loans available, helping you make the right financing decision for your business.

Types of Commercial Real Estate Loans

Finding the right commercial real estate loan can be crucial for business growth. Each loan type serves a specific purpose, tailored to different business needs and financial situations. Here’s a closer look at the different types:

Traditional Commercial Mortgage

A traditional commercial mortgage helps businesses buy or refinance commercial properties. These loans offer extended commercial real estate loan terms of up to 20 years, with either fixed or variable interest rates, providing predictable payments. 

Ideal for companies with stable finances and solid credit, this loan type accommodates larger loan amounts for established businesses, balancing flexibility with manageable monthly payments.

SBA 7(a) Loan

The SBA 7(a) Loan, backed by the Small Business Administration, offers small businesses a flexible financing solution with loan amounts up to $5 million. It provides lower down payments and longer repayment terms, making it accessible for companies needing affordable funding. 

Known for supporting property investment and working capital, it’s a popular choice among growing businesses seeking financial stability.

SBA 504 Loan

The SBA 504 Loan supports major fixed asset purchases, including real estate or equipment, offering fixed commercial real estate loan rates with terms of up to 25 years. 

This government-backed loan provides predictable repayment, ideal for companies looking for expansion. With larger loan amounts and fixed rates, the 504 Loan suits businesses focused on significant long-term investments.

Bridge Loans

Bridge loans provide short-term financing to fill gaps until securing a permanent loan. They offer fast funding with high interest, usually repaid within 6-12 months, making them ideal for temporary cash flow needs. 

Investors exploring no money down options for large business loans often use bridge loans, although they best suit experienced borrowers handling high interest rates.

Construction Loans

Construction loans fund new building projects or significant renovations. They feature interest-only payments during construction, allowing flexibility in cash flow management. 

Developers value these project-focused loans, although they come with higher interest rates and require strict commercial real estate lending guidelines compliance. Detailed budgets and clear timelines are essential for approval.

Hard Money Loans

Hard money loans, offered by private lenders, provide fast funding secured by property rather than credit. With high interest and short repayment terms, they’re useful for high-risk or quick-turnaround projects, like property flipping. 

Often explored as no-money-down options for large business loans, hard money loans come with minimal requirements, offering fast solutions for urgent financial needs.

CMBS (Commercial Mortgage-Backed Securities) Loans

CMBS loans pool loans into securities sold to investors, offering lower interest rates and structured terms for stabilized assets like shopping centers or apartment complexes. 

These loans favor income-generating properties, providing commercial real estate loan terms ideal for long-term investments. CMBS loans deliver stability, though they may limit flexibility on prepayments, fitting properties with predictable revenue streams.

Mezzanine Loans

Mezzanine loans blend debt and equity financing, offering additional capital without full ownership transfer. With higher interest but no collateral, this option suits high-value investments where owners want extra funding without diluting ownership. 

Mezzanine loans work well in urban markets, providing businesses with flexible funding for profitable projects while maintaining control over their assets. For more in-depth insights, check out the 2023 Loan Mastery: Definitive Guide to Small Business.

Key Factors to Consider When Choosing a Loan

Deciding on the different types of commercial real estate loans requires a close look to ensure the loan meets your specific property and business needs. Here are the key factors:

Property Type and Purpose

Each loan type suits specific property uses, like office or multifamily housing. Understanding property purpose helps match loan options with business goals, as lenders set commercial real estate loan terms based on property type.

Interest Rates and Loan Terms

Interest rates can be fixed or variable, affecting payment consistency. Longer loan terms lower monthly payments but increase total costs. Evaluating commercial real estate loan rates ensures the loan structure aligns with your budget.

Down Payment Requirements

Down payment requirements vary by loan type, often 10% for SBA and 20-30% for traditional mortgages. Using a commercial loan calculator helps businesses estimate upfront costs, supporting effective budget planning for initial expenses.

Loan Approval Criteria

Lenders evaluate factors like credit history and cash flow for approval. Meeting commercial real estate lending guidelines secures favorable terms, especially for high-value properties, emphasizing a strong financial profile and business history.

Risk and Return Considerations

Balancing project risk and potential returns guides loan selection. High-risk loans like hard money require higher interest, while SBA loans offer lower risk. Choosing loans based on risk supports strategic planning, especially for urgent needs.

Best Use Cases for Each Loan Type

Finding the right loan involves aligning it with your business needs. Here’s a look at which types of commercial loans work best for various scenarios.

  • Traditional Commercial Mortgage: Ideal for established businesses buying or refinancing property, offering stable, long-term loan terms.
  • SBA 7(a) Loan: Suitable for small businesses purchasing retail or office spaces, with favorable rates and terms.
  • SBA 504 Loan: Best for expanding companies needing fixed rates on larger, specialized properties like warehouses.
  • Bridge Loans: Quick, short-term financing for real estate investors between buying and selling, with higher interest rates.
  • Construction Loans: Ideal for developers funding new builds, with flexible repayment until project completion.
  • Hard Money Loans: Quick capital access for fix-and-flip projects, with fewer requirements, suited for high-risk properties.
  • CMBS Loans: Works well for income properties like apartments, offering fixed terms and favorable lending guidelines.
  • Mezzanine Loans: Provides additional funds for high-value urban properties without full equity dilution, balancing risk.

Conclusion

Understanding the different types of commercial real estate loans helps businesses select financing that aligns with their goals and financial health. Each loan type offers unique value, from SBA loans for small businesses to hard money loans for high-risk projects. 

Evaluating commercial real estate loan terms, down payment requirements, and commercial real estate loan rates is essential. Consulting a financial advisor can also guide businesses through options and help get the right term for $1 million business loan needs. Making informed choices maximizes investment returns and supports long-term growth.