There are many different loan options for your commercial real estate investment. Understanding the differences between the loans and how they impact your financial portfolio will help you manage your business better. Let’s examine the different loan options available and their advantages and disadvantages.
Commercial Mortgage-Backed Security Loans
When applying for CMBS Conduit Loans, the lender will join your mortgage with those mortgages of other commercial real estate borrowers. Buyers on a secondary market buy the loans. If you do not have a high credit score or enough business history to qualify for a traditional loan, a CMBS Loan may be the best option. Lenders may offer up to $50 million, but most loans range from $1 million to $3 million. You are responsible for monthly payments and a final balloon payment due at the end of the term. Terms vary from 5 to 30 years. Review your loan terms to understand any prepayment penalties.
Small Business Administration Loans
The SBA loans allow lenders to extend better loan terms. If you are investing in commercial real estate, the SBA 7(a) loan provides you with up to $5 million. With the SBA 504 loan, you can borrow up to $10 million for real estate or long-term capital acquisitions.
Commercial Mortgage Loans
Unlike CMBS Conduit Loans, traditional commercial mortgage loans have stricter underwriting requirements. You will need an excellent business credit history. All business owners should have a strong credit score. A typical commercial mortgage loan will have a 20-year term, and the collateral is the financed property. While the requirements are stricter, you receive a lower interest rate.
Alternative lenders specialize in bridge loans. These loans offer terms as short as six months but can be as long as three years. These specialty loans are for borrowers that need additional time to secure long-term financing. Business owners looking to move quickly to secure a deal are ideal candidates for bridge loans. Like commercial mortgages, bridge loans have strict underwriting requirements because of the increased risk.
Hard Money Loans
Private investors specialize in hard money loans. They get to know the borrower, and many have an active interest in the successful development of the property. The lender can provide cash, often in as little as two days after approval. Many fix-and-flip home investors use hard money loans to finance their real estate investments.
No rule says one mortgage option is better than another. Every business owner needs to understand the options available and select the loans that best meet their needs.