Purchasing a commercial real estate property comes with its own set of benefits, mostly in the form of tax benefits and the ability to build equity over time. With that said, there are many options to pick from when choosing a loan to make the purchase. This short article provides a brief introduction to several different commercial real estate loan types. It should be noted that loan rates do fluctuate depending on inflation and credit scores.
SBA 504 Loans
Perhaps the most sought-after commercial loan is an SBA (Small Business Administration) 504. This is a long-term financing option that usually lasts for about ten or twenty years and is designed to help expand or modernize a business. One especially useful aspect is that 504 loans require a much lower down payment than others. Because the lender puts up half the cost and the SBA adds another 40%, the borrower only has to front the remaining 10%, as opposed to the usual 25%. There are some downsides to this loan, though. For instance, 504 loans are limited to specific uses such as improving land, modernizing a property, or purchasing new equipment.
SBA 7(a) Loans
For commercial real estate services, these loans contain a little more flexibility than a 504 would. SBA 7(a) loans enable the borrower to cover start-up costs and debt financing as well as the aforementioned renovations or modernizations. Depending on the intended use for the loan, the terms associated may be slightly higher. For instance, the terms of an SBA 7(a) loan intended for real estate use may be up to 25 years, whereas the terms may be between only 5 and 7 years if put toward working capital. SBA 7(a) loans have a much lower minimum and maximum loan size than SBA 504 loans. SBA 7(a) loans have a maximum of $5 million, whereas SBA 504 loans have a maximum of $20 million or more, in some special circumstances.
Traditional Bank Loans
If you don’t want to take out a loan with the SBA, you can often turn to other commercial lenders like Bank of America and JPMorgan Chase for a commercial loan. These are also referred to as “conventional loans.” Bear in mind of course, that not every bank operates with the same requirements or restrictions. It’s also important to mention that rates for traditional bank loans are not set to the same parameters as the Small Business Association and can fluctuate based on credit score, as well as several other factors.