Commercial Loans
What is a Commercial Loan?
A commercial loan is a debt-based funding arrangement between a business and a financial institution such as a bank. It is typically used to fund major capital expenditures or cover operational costs that the company may otherwise be unable to afford.
Commercial real estate (CRE) refers to income-producing property used solely for business purposes (rather than residential). Examples include:
Retail malls and shopping centers
Office buildings and complexes
Hotels and resorts
Financing for the acquisition, development, and construction of these properties is typically accomplished through commercial real estate loans or mortgages secured by liens on commercial property.
Borrower Structure
Commercial real estate loans are often made to business entities such as corporations, developers, limited partnerships, funds, and trusts. These entities may be formed solely for the purpose of owning commercial property.
If the entity has no financial track record or credit rating, lenders may require the principals or owners to personally guarantee the loan. This gives the lender access to individuals with a credit history in case of default. If no guaranty is required and the property itself is the only collateral, the loan is called a non-recourse loan . In this case, the lender has no recourse beyond the property itself.
Investment Purpose
With commercial real estate, an investor (often a business entity) purchases the property, leases out space, and collects rent from the businesses that operate within the property. The investment is intended to generate income.
When evaluating CRE loans, lenders consider:
The collateral (property value and income potential) Creditworthiness of the entity or principals/owners Financial statements (3–5 years) Tax returns (3–5 years) Financial ratios , such as:Loan-to-Value (LTV)Debt-Service Coverage Ratio (DSCR)
Loan Structure
Typical term: 7 years
Amortization period: 30 years
Borrowers make payments as if the loan were fully amortized over 30 years, but at the end of 7 years a final “balloon payment” of the remaining balance is due.
Interest Rates and Fees
Interest rates are higher than residential loans.
Additional fees usually apply: Appraisal fees, Legal fees, Loan application and origination fees, Survey fees.
Rates and Terms
Loan Amount: $1M to $500M+
Rates: 4% – 10%
Terms: 25 to 30 years
Amortization: Principal & Interest
Collateral: Any income-producing commercial property
Financing: Equity or Debt
Area: Continental U.S. and Worldwide
Loan-to-Value (LTV): Up to 80%
Estimated Closing Time: 30 – 45 days
Expense Deposit: Required