Are you a business owner that needs a real estate loan? Whether you want to purchase real estate as an investment, buy property for your business location, or make renovations to your business property, there are several financing options available.
Your choices will depend on several factors that include the type of real estate project as well as your business and your financial situation. Here is what you need to know about business loans for real estate.
Reasons you might need business loans for real estate
First, why are you looking to finance real estate with a business loan? Are you an investor or a business owner who will occupy the property? The answers to these types of questions will determine your loan options.
The reasons that you might need business loans for real estate include:
- The purchase of a commercial property for your business
- Refinancing an existing loan on a commercial property
- Paying for renovations on an existing commercial property
- Purchasing a commercial property for investment purposes
Understand your real estate project thoroughly
When you finance commercial real estate, your industry and use of the property might limit your loan choices. Before you seek financing with a business loan, you should clearly define your project and be ready to describe it in detail to lenders.
For example, some real estate loans are only approved for owner-occupied buildings. Most real estate lenders exclude non-profit businesses from their loans. If you are a non-profit, check out Kabbage as a business funding option.
Where to get business loans for real estate
Once you have a clear picture of your real estate project, you’re ready to search for business loans that match your needs.
You can apply for commercial real estate loans at your local credit union or with any major bank. Gaining approval from a bank is usually difficult for small businesses that don’t have strong financials or excellent credit.
There are also some online lenders that offer business loans which you can use for real estate. Some Small Business Administration (SBA) loans are also available, both through banks and online lenders.
Business loans to purchase or refinance real estate
If you own an established business that is financially sound, you may be able to qualify for an SBA loan to either purchase or refinance real estate. There are two main SBA loan choices: the 7(a) loan and the SBA Grow Loan (504).
The 7(a) loan is the SBA’s flagship loan, with over $5.5 billion in loans made in 2016. You can use 7(a) loan proceeds for such things as capital improvements, equipment purchases, inventory, refinancing business debt, and the purchase or construction of real estate for business purposes.
7(a) loans can be up to a maximum of $5 million, with the longest term set at 25 years. Both fixed and variable interest rate loans are available, and APRs on these loans are some of the lowest on the market.
The loans have a 90% loan-to-value (LTV) ratio, which means that you should be prepared to fund a 10% down payment on your real estate purchase.
To be eligible for a 7(a) loan, the typical requirements are:
- A FICO score of 680 or better for primary business owners
- At least two years in business
- Show annual revenue, usually of at least $50,000
The other SBA loan is the 504 Grow Loan, which is often used to finance the purchase of real estate or equipment and has a maximum loan amount of $5 million.
You can use a 504 loan to buy land or existing buildings or to construct new facilities. You cannot use this type of loan for speculative real estate purchases or the purchase of rental properties.
504 loan terms are typically 20 or 25 years, and APRs are competitive. This loan also has a 90% LTV ratio requirement.
The 504 loan operates on the premise that your “improvements” will either create jobs or help a local economy. Because of this, you’ll need to partner with a local Certified Development Company (CDC) as part of the qualifications. The SBA has a search engine to find CDC’s here.
Other eligibility requirements for an SBA 504 loan for real estate include:
- Be in business at least two years.
- Have tangible net worth and revenue (requirements might change depending on the lender).
- Have sufficient credit.
- Real estate purchases must be at least 51% owner-occupied.
These SBA loans don’t come directly from the Federal Government, even though the SBA guarantees a portion of every loan. Instead, you apply for an SBA from a traditional bank or online lender.
One of the top online sources of SBA loans is Smartbiz. This San Francisco-based lender helps businesses apply and qualify for SBA loans, shortening the lending and approval process from months to weeks.
Smartbiz has a simple online application, and pre-qualification for an SBA loan takes just a few minutes. Once you are approved, your loan could be funded in about 45 days. This could take longer depending on the complexity of the loan and the documentation required.
Business loans for real estate renovations
You can use an SBA loan for real estate renovations, but this may not be the best choice. If you want to stretch out repayment for ten years or more to finance a remodel, look into the SBA loans. Otherwise, there are several lenders with favorable terms and much quicker funding and favorable terms that can help you with real estate renovations.
LendingClub is a top online provider of business loans, with loans up to $300,000. The company requires that you have two years in business, a credit score of at least 660, and a minimum annual revenue of $75,000.
LendingClub’s rates start at 6% with repayment terms up to 5 years. There is also a loan origination fee that starts at 0.99% but no prepayment penalties. The application process is entirely online and, even with real estate, you won’t need title insurance, business plans, or appraisals.
Funding Circle is another popular online lender of small business loans. Loans with this company range from $25,000 to $500,000, with repayment terms up to 5 years. APRs range from 5.5% to 23%, depending on credit.
Funding Circle also requires that your business is in operation for two years and have a minimum revenue of $150,000. There is a small loan origination fee added to your balance, but no prepayment penalties.
A Funding Circle application takes just a few minutes online, and loan eligibility is usually determined within a few days. Once a loan is approved, they fund within about a week.
If you haven’t been in business for two years yet, check out OnDeck for a business renovation loan. This is the venture capital arm of Google, and only requires nine months in business for some of its smaller loans.
The company also wants to see that you have at least $75,000 in annual revenue as well as a minimum 500 credit score.
Loans with OnDeck are from $5,000 to $500,000, with rates starting at 5.99%. There is a loan origination fee, which is lowered and then disappears for subsequent loans.
There are several benefits to borrowing from OnDeck. Your terms improve with subsequent loans, and there are no prepayment penalties. Also, if you are approved for financing, the company will deposit funds in your bank in as little as one day.
How to get business loans for real estate
The process to get a business loan for real estate will vary depending on your funding choice. For example, if you choose to apply for an SBA loan, you’ll need to prepare ahead of time and be ready with mounds of paperwork.
Just a few of the items that you’re going to need for either a conventional bank loan or an SBA loan include:
- Business plan, including financial statements and projections
- Tax returns
- Business ownership documentation
- Business licenses
- Resumes of key management
- Any business leases or outstanding contracts
- Property information (sales contract, appraisal, inspection reports)
Some of the online lenders that we mentioned won’t ask for this much documentation. However, you should be prepared to email anything they request as quickly as possible to expedite your application.
As you get ready to apply for business loans, be sure that you know your current credit score. If you don’t, you can get a free credit score report here. This is something that almost every lender will review.
Weighing your business loan options
When you shop for business loans to finance your real estate project, you should weigh several factors. One thing you’ll want to do is to estimate the potential revenue or gains that your business will receive from this purchase or renovation. Be sure that the total cost of any loan is less than those gains.
As you shop for business loans, compare such things as interest, fees, and other terms from the various lenders. Other things to consider are the speed of funding and an affordable monthly payment.