Business Mortgage Loan: How to Find the Best Real Estate Financing

Every business needs a place to do business.

For some entrepreneurs, that place of business ends up being their homes. But the majority of small business owners need an office, warehouse, or storefront to conduct their business in.

And that real estate can be expensive. When you need to purchase some type of commercial real estate for your business, you can make the price tag easier to manage with a business mortgage loan, rather than a residential one.

A business mortgage loan is a loan for financing the purchase of commercial real estate property, instead of residential property.

In this guide, we’ll walk through everything there is to know about these types of small business loans.

Here are the top business mortgage loans:

1. SBA 7(a) loan
2. SBA CDC/504 Loan
3. Hard Money Loan
4. Traditional Mortgage Loan

Now that you know what a business mortgage loan is, you’re going to want to know the best mortgage loans available.

Well, there are four main types of business real estate loans on the market, with variations within each type.

Here’s a top-level view of how each works and what it takes to qualify for them.

An SBA 7(a) loan is the SBA’s most common and popular type of financing program.

You can use a 7(a) loan for a wide variety of business purposes, including the acquisition and renovation of commercial real estate.

When used for real estate purposes, an SBA 7(a) loan is a mortgage backed by the SBA.

The SBA offers loans of up to 85% to 90% of the property value, setting a maximum mortgage amount at $5 million. This means that your down payment would end up being around 10% to 15% of the purchase price.

However, if you’re a qualified borrower, you might have the down payment waived for this business mortgage loan product.

The commercial real estate loan terms on a SBA 7(a) loan can last as long as 25 years, making this type of business mortgage a good option for established businesses looking for long-term, cost-effective financing, but that might not qualify for a bank loan.

Why would a business owner pursue a business mortgage loan?

Well, just like any type of property, commercial real estate can be purchased, developed, and renovated.

In the best case—when your business is growing—you need to invest in more property, or reinvest in current property. And in a not-as-good-case, you might need to renovate existing property if you incur any damages to it.

And accomplishing these tasks can be expensive—especially as a small business owner who’s covering many other expenses and trying to conserve cash flow.

If you can’t afford to finance the purchase, construction, or renovation of commercial real estate yourself, that’s where business mortgage loans or business construction loans come in.

A mortgage is generally thought of and referred to as a loan.

However, a mortgage isn’t technically a loan.

A loan is something that a lender gives you, typically a sum of money.

A mortgage, on the other hand, is actually just a security instrument that you give the lender.

Very technically speaking, a mortgage is a document that protects the lender’s investment and interest in their lending to finance your property.

In a mortgage agreement, you, the borrower, are the mortgagor, and the lender is the mortgagee. A mortgage document is what creates a lien on the property in question. The lien functions as security for the lender—if you can’t pay them back, they have the right to seize the property and recoup their losses (called a foreclosure).

So, all in, a mortgage is simply a document that secures the lender’s interest in a loan to finance the purchase of a property.

You know what business mortgage loans are and what makes them unique. But how do they really work?

Well, you already know that a business mortgage loan requires a lien—or a legal right that an owner of a property gives to a lender, serving as a guarantee for the repayment of a business mortgage loan. If the owner can’t pay the loan back fully, the creditor might be able to seize the asset secured by a lien. This gives the creditor some protection against the inevitable risk of default.

So when you take out a business mortgage loan, expect to have a lien placed on your business’s property.

You should also expect to have a down payment, typically ranging from 20% to 30% of the loan’s value.

Now, for the specifics of business mortgage financing.

Whereas residential real estate loans are typically amortizing, where you repay the financing in regular installments over a fixed period of time, business mortgage loans can come with two types of repayment schedules:

Immediate-term loans (of two years or less) and long-term loans (of five to 20 years).

The structure of the repayment could be in the form of an amortized loan, or a balloon loan. You’re familiar with an amortizing loan—a loan that you pay back with fixed installments plus interest, until you’ve paid back the loan in full.

A balloon loan, on the other hand, is where you pay off the interest first with consistent payments, and then once the interest is fully paid off, you make one final, large payment of the loan principal.

It’s important to know what kind of payment structure you’ll be working with before you commit to a certain business mortgage loan. The way you pay back the loan can really affect your cash flow. For instance, a balloon payment can strain your cash reserves if you weren’t prepared to make such a large payment.

When you apply for a commercial mortgage loan, don’t be surprised if you see loan rates that are higher than what you’d get with a residential mortgage loan.

Why? Well, small businesses are riskier to lend to, especially if you’re just starting up. Plus, most businesses have less established credit histories than individuals.

Also, your loan rate will vary based on the type of commercial mortgage lender you’re applying to. Credit unions and bank loans have rates ranging from 3.35% to 6%, whereas alternative lenders have higher rates.

As with other regular small business loans, business mortgage loans come with upfront fees that you should be prepared for.

Upfront fees are typically bundled into the overall cost of the commercial mortgage loan—covering the appraisal of the property, legal costs, loan application, loan origination, and survey fees. Some commercial mortgage lenders will want borrowers to pay upfront fees before the loan is approved. Other lenders will just apply the fees annually.

You should also be aware that a commercial mortgage loan might come with a prepayment penalty if you’re able to pay early. A lender wants to preserve the monetary gain they predicted on a loan, so they might charge you for avoiding interest by paying early.

All in, make sure you fully read your business loan agreement and get a sense of what rates and fees you’ll be charged throughout the life of the loan before you sign on the dotted line.

If you’ve ever applied to a residential mortgage loan, then you may assume that the process of applying to a business mortgage loan is similar.

Well, it’s really not.

Most commercial mortgage loans (unless you pursue the SBA), are not backed by a government entity.

Residential mortgage loans are often backed by the Federal National Mortgage Association (commonly known as Fannie Mae). This makes qualifying for residential loans easier.

When you do qualify, you’ll also get lower rates than you’d see with commercial real estate loan rates. That’s because, without the government backing their loans, commercial mortgage lenders will be taking on all of the risk of lending to your business. They’ll compensate for this risk by charging higher interest rates.

Also, business mortgage lenders will look at more than just the property you’re purchasing when determining if you qualify. They will also likely look at the details of your business. That’s because lending to businesses is generally riskier than lending to individuals. The business is on the hook for paying the loan off, and small businesses have poor survival rates. There’s just less assurance that the company will be around to pay off its debts.

As you saw when we listed our top business mortgage loan options, the criteria a lender will look at include LTV ratio, collateral and property information, your credit score, your business’s liquidity, and your previous ownership experiences.