What Is a Commercial Real Estate Loan?

A commercial real estate loan is a type of financing for business owners to buy property. Its requirements vary by lender.


Generally, commercial loans require a higher credit score than mortgages or consumer residential loans. They often have longer terms and may involve a higher down payment.

Lenders may also ask for a personal guarantee from the principals or owners of an entity that is applying for a commercial real estate loan. This ensures that they will be able to cover the debt if the company fails.

Interest Rates

A commercial real estate loan is similar to a mortgage loan for personal property, but it is used to purchase business properties. The loan is secured by a lien against the property, which can be taken back if the borrower fails to pay off the debt.

Interest rates are based on the lender’s perceived risk and the type of property. The higher the risk, the greater the potential for default and the higher the rate. In addition, lenders may charge points to reduce the interest rate. These fees are typically paid at closing and can total several thousand dollars.

Commercial mortgage rates are also affected by the overall economic outlook, which affects consumer confidence and investor demand for real estate investments. It is important to shop rates and terms with multiple lenders to find the best deal for your business.

Most commercial mortgage lenders set their rates in accordance with “index” rates that are ultimately governed by national institutions like the Federal Reserve and Department of Housing and Urban Development (HUD). A lower index, such as the 10-year Treasury yield, is associated with higher rates.

Another factor that impacts commercial mortgage rates is the credit quality of the borrower. Prime borrowers who have excellent personal credit scores and solid business finances are likely to get the lowest commercial mortgage rates. Borrowers with below-average credit scores and a less-than-stellar business plan are often required to pay higher commercial mortgage rates or may be better served by alternative lending options such as bridge loans and hard money loans.

Payment Options

There are many different commercial real estate loan payment options available. Conventional commercial loans are similar to home loans and can have repayment terms of up to 20 years. These are usually based on the debt service coverage ratio (DSCR), which calculates a property’s cash flow to ensure it can cover annual mortgage debt payments.

Other commercial real estate financing options include blanket loans, which allow you to purchase multiple properties with a single mortgage. This can help you save on upfront fees and interest costs. A blanket loan is often ideal for businesses that need to acquire several properties in one location or build out a multi-tenant property.

Bridge loans are another type of commercial real estate finance. They’re used to provide quick funding to compete with all-cash buyers or until long-term financing can be secured. They typically have short repayment terms and high interest rates, but they can be an excellent option for business owners who need to move quickly on a piece of property.

Like residential mortgages, commercial real estate loans are generally made to individuals or business entities, such as corporations, limited partnerships and funds. However, business owners may also be required to make a personal guarantee. If the company fails to repay its debt obligations and a liquidation of its assets doesn’t produce enough funds to cover the loan, a personal guarantee can be triggered.


Commercial real estate loans are used to purchase and maintain commercial properties like light industrial warehouses, office buildings or retail space. With few exceptions, any property that is designed to produce revenue through the use of the physical structure (like a rental apartment building) is considered commercial real estate. Unlike residential mortgages, which are typically issued to individuals, commercial real estate loans are usually made to business entities like corporations, limited partnerships and funds.

As a result, the underwriting process is slightly more involved when compared to residential mortgages. When applying for a commercial loan, be prepared to provide more detailed documentation that includes three years of personal tax returns, financial statements and a business balance sheet. In addition, be ready to furnish a current listing of tenants with their contact information, tenancy dates and lease details.

Regardless of the lender you choose, it is always wise to shop around for rates and terms. You may be able to find a lender that offers more flexible terms or better interest rates on commercial loans than other lenders in your area.

In many cases, commercial hard money lenders can offer quicker turnaround time for funding than traditional banks. This is especially true for short-term capital needs that aren’t as complex as the full-scale financing that a typical business requires.


The physical real estate that’s being financed serves as the primary collateral for commercial real estate loans. However, lenders may require a borrower to make a personal guarantee as well. This means that if the property fails to generate enough cash flow to repay the loan, the lender can seize and liquidate the assets.

Like residential mortgages, commercial real estate loans are typically issued to business entities rather than individuals. They’re also usually only available to investors with strong financial histories.

Some lenders offer “cross-collateralized” commercial real estate loans, which allow borrowers to pledge multiple properties as collateral for one loan. This can provide a greater amount of security for the lender, as it has a wider portfolio of assets to seize in the event of default.

Another type of commercial real estate financing is a conduit loan, which is pooled together with other similar commercial mortgages and sold on the public debt markets. This can help reduce the risk and cost of commercial real estate loans for many small business owners.

Agency loans, which are offered by government sponsored agencies such as Fannie Mae and Freddie Mac, are another form of commercial real estate lending. These loans are typically non-recourse and feature competitive rates. They’re also often used to finance multifamily, student housing and affordable housing projects.