Who is making commercial loans today? If you need a commercial real estate loan, to whom should you submit your deal? What kinds of lenders are making commercial loans today? There is a pecking order in the commercial financing industry. The lenders with the very best commercial mortgage rates cream the market. If a commercial loan won't qualify with the very cheapest commercial lender, the commercial mortgage deal then goes to the commercial lender with the next best commercial mortgage rates - and so on. The pecking order is as follows: life insurance companies, conduits (CMBS lenders), banks, savings banks and S&L's (known as thrifts), credit unions, mortgage REIT's, and finally hard money lenders. (Visit Our Commercial Loans Center)
What kind of commercial mortgage rates can I expect? Commercial mortgage rates are typically about 75 to 150 basis points (0.75% to 1.50%) higher than the prime, 30-year residential mortgage rate. For example, suppose you could refinance your personal residence on a 30-year basis at 4.0% today. If you are an "A" quality borrower, you could therefore expect conventional commercial mortgage rates from commercial banks to be between 4.75% and 5.5%. Commercial mortgage rates on SBA loans and USDA loans are typically 2% to 2.5% higher than the prime residential mortgage rate. Therefore, if the banks in town are quoting 4.0% on 30-year home loans, you will probably pay between 6.0% and 6.5% for an SBA loan or a USDA loan. The commercial mortgage rates of life companies and conduits - because the loans are typically quite large ($3MM+) - are a little better than the commercial mortgage rates of the typical bank. You can expect to pay 35 to 75 basis points (0.35% to 0.75%) over the prime, 30-year residential mortgage rate. (Visit Our Commercial Mortgage Rates Center)
Will I qualify for a commercial real estate loan? Due to the Great Recession, banks are much tougher when they underwrite commercial loans these days. Will you qualify? It all depends on the three C's of underwriting - credit, capacity to repay, and collateral. Let's look at credit first.
Commercial banks are the lenders who are making most of the commercial loans today, and banks require good credit. You will usually need a credit score of at least 680, and a credit score of over 700 is greatly preferred. Now if your credit score is lower than 680, please don't panic. We recently convinced a bank to approve a commercial loan for a veterinarian with a foreclosure on his record (due to a divorce) and a credit score of just 630. And even if a bank won't do your particular deal, there are still scores of hard money commercial mortgage companies willing to make subprime commercial loans. (Visit Our Commercial Real Estate Loan Center)
What is a USDA Business and Industry loan? Rural areas in America are often very low income areas. Jobs are scarce. This is why many international car companies have opened car manufacturing plants in the rural South in recent years. The wage rates in the rural South are among the lowest in the United States. In order to foster the creation of jobs in rural areas, the Federal government offers a partially-guaranteed commercial loan program called the USDA Business and Industry ("B&I") Loan program.
The USDA Business and Industry Loan Program is modeled after the very successful SBA loan program. The United States Department of Agriculture (USDA) does not actually make these loans. Instead, the USDA merely guarantees qualified commercial loans made in rural areas. The loans are actually underwritten and made by banks. If the construction of a new building or factory will create long-term jobs in a rural area, up to 80% of the loan will often be guaranteed by USDA. (Visit Our USDA Business and Industry Loan Center)
Should I apply for an SBA loan? The answer is probably, "Yes." SBA loans, also known as Small Business Administration loans, are a good deal for most commercial borrowers. The borrower can obtain a 25-year commercial loan with no balloon payment. Established companies can obtain a loan of up to 90% loan-to-value to buy commercial property, as long as they intend to occupy 51% of the space (owner-occupied) and can demonstrate enough historical net income to service the debt. Lastly, a company can use an SBA loan to also buy needed equipment. We recently arranged an SBA loan for a new company to build a factory on leased land and to buy the needed equipment (grinders, conveyors, dust collectors, etc.).
The Small Business Administration does not actually make loans. Instead, the SBA merely guarantees up to 90% of a bank loan. The loan is processed and made by either a commercial bank or a specialized small business lending company. Many of these banks and specialized SBA lenders enjoyed preferred underwriting status, which allows them to approve their own deals without first obtaining an approval of the Small Business Administration.
There are two types of SBA loan programs, the SBA 7a program and the SBA 504 program. The SBA 7a program is a 25-year fully-amortized loan. It can be used to buy either owner-occupied commercial real estate and/or equipment. (Equipment loans have a shorter term.) The loan is a floating rate program, tied to prime with a margin of 1.75% to 2.75%. Established companies can qualify for up to 90% loan-to-value financing, while start-ups are normally limited to 70% loan-to-value. (Visit Our SBA Loans Center)