What is a Commercial Real Estate Loan?

A commercial real estate loan is a type of business loan that allows a company to borrow money by using one of its real estate holdings as collateral. Unlike a mortgage loan, a commercial loan of this type does not require that the borrower use the funds specifically for the acquisition of property. Since the terms and conditions related to various types of commercial property loans vary, taking the time to compare rates and provisions with different lenders will often result in finding the best possible deal and allowing the company to retire the loan in a shorter period of time.

There are a number of benefits associated with obtaining a commercial real estate loan rather than going with other types of business loans. One has to do with the fact that one or more of the properties owned by the debtor serve as collateral. Pledging the collateral reduces the degree of risk that the lender assumes as part of the loan approval process. At the same time, the borrower still has full use of those properties for the duration of the loan, and can use the loan proceeds for expansion or other projects without dipping into its own financial reserves.

Lenders typically set specific qualifications that a client must meet in order to be approved for a commercial real estate loan. Typically, the amount of the loan must be over a set minimum. Loan amounts under the minimum may require application for a different type of business loan. At the same time, the property pledged as collateral for the loan must have a current market value that exceeds the loan amount by a certain percentage. For example, a lender may be willing to provide a commercial real estate loan that is equal to 80% of the pledged property’s market value, but not 90%.

The general financial condition of the borrower is also a factor when applying for a commercial real estate loan. Some lenders will require that the company have been in business for a minimum amount of time, with two years being common. The credit rating of the company will also be a consideration, as well as the current trend in revenue generation. All these factors will help determine the risk involved in doing business with the loan applicant, and influence the final rate and terms that are extended by the lender.

A commercial real estate loan can be used for many different purposes. In some cases, the funds may be used for property improvements of existing holdings. At other times, the funds may be used to fund a product launch or some other type of expansion. It is even possible to use this type of loan to buy new real estate, provided there are assets in hand to use for collateral.