What Is a Commercial Real Estate Loan? Everything You Need to Know Before You Borrow

What is a commercial real estate loan? Matt Bingaman explains types, terms, and tips to help you borrow smart. Reach out to Matt for personalized CRE advice.

Before You Sign Anything, Read This

I’ve sat across the table from hundreds of business owners and investors over the years, and I can tell you with absolute certainty — most of them didn’t fully understand the loan they were getting into until we talked it through together. That’s not a criticism. Commercial real estate loans are genuinely complex. But complexity shouldn’t be a barrier to building wealth through real estate.

So let’s fix that right now. Here’s everything you need to know about commercial real estate loans, explained the way I’d explain it to a client over coffee.

What Is a Commercial Real Estate Loan?

A commercial real estate loan is a mortgage or financing arrangement secured by commercial property — meaning property used for business or investment purposes rather than personal residential use.

Unlike a home mortgage where the lender primarily evaluates you as a borrower, commercial real estate loans involve a dual analysis — the borrower AND the property. Lenders want to know: Can you repay this loan? And can the property generate enough income to support the debt?

That dual focus changes everything about how these loans are structured, priced, and underwritten.

Types of Commercial Real Estate Loans

In my experience, choosing the right loan type is just as important as finding the right property. Here’s a breakdown of the most common options:

SBA 7(a) Loans

• Best for: Owner-occupied commercial properties
• Down payment: As low as 10%
• Loan amounts: Up to $5 million
• Terms: Up to 25 years for real estate
• Why I love it: It opens doors for business owners who can’t tie up massive capital in a down payment

SBA 504 Loans

• Best for: Large fixed assets like real estate and equipment
• Structure: 50% bank loan + 40% SBA-backed loan + 10% borrower equity
• Loan amounts: Up to $5.5 million (SBA portion)
• Why I love it: Below-market fixed rates on the SBA portion — outstanding for long-term stability

Conventional Commercial Mortgages

• Best for: Investors and businesses with strong financials
• LTV: Typically 65–75%
• Terms: 5–20 year terms with 20–30 year amortization
• Why it works: Flexible across property types with competitive rates for qualified borrowers

Bridge Loans

• Best for: Short-term financing while stabilizing or repositioning a property
• Terms: Typically 12–36 months
• Rates: Higher than permanent financing
• When I recommend it: Value-add acquisitions where the property isn’t yet stabilized

Hard Money Loans

• Best for: Fast closings, distressed properties, or borrowers who don’t qualify conventionally
• Rates: Significantly higher — expect double digits
• Terms: Short, typically 12 months
• Use with caution: Great tool in the right situation, expensive if you overstay your welcome

CMBS Loans (Commercial Mortgage-Backed Securities)

• Best for: Stabilized, income-producing properties over $2 million
• Terms: Typically 5–10 years, 25–30 year amortization
• Trade-off: Less flexibility, but can offer competitive fixed rates

What Lenders Look At

When you apply for a commercial real estate loan, here’s what lenders are evaluating:

• Your Credit Score — Typically 680+ for conventional loans; 640+ for SBA
• Business Financials — 2–3 years of tax returns, profit and loss statements
• Property Income — Current or projected rent rolls, vacancy rates, operating expenses
• DSCR — Most lenders want to see 1.25 or higher (meaning the property generates 25% more income than it costs to service the debt)
• LTV Ratio — Most lenders cap at 65–80% depending on property type and loan program
• Your Experience — Especially for investment properties; lenders like to see a track record

Key Loan Terms Explained Simply

I always walk my clients through these before we approach any lender:

• Amortization — The schedule by which you pay down principal and interest. In commercial lending, 25–30 year amortization is common even on shorter loan terms.
• Balloon Payment — At the end of the loan term (say, 10 years), the remaining balance is due. You either pay it off or refinance.
• Prepayment Penalty — Many commercial loans penalize you for paying off the loan early. Know this before you sign.
• Recourse vs. Non-Recourse — Recourse loans allow lenders to come after your personal assets if you default. Non-recourse limits their recovery to the property itself. Non-recourse typically comes with stricter terms.
• Interest Rate — Fixed or variable. Fixed gives you certainty; variable can be cheaper short-term but carries risk.

Common Mistakes I See Borrowers Make

Let me save you some pain:

1. Not shopping lenders — The first offer is rarely the best offer
2. Underestimating closing costs — Budget 2–5% of the loan amount for fees, appraisals, environmental reports, and legal costs
3. Ignoring the prepayment penalty — I’ve seen deals fall apart at sale because the seller didn’t realize their loan had a heavy prepayment structure
4. Overleveraging — Just because a lender will give you 80% LTV doesn’t mean you should take it
5. Waiting too long to get pre-qualified — Sellers take pre-qualified buyers far more seriously

The Bottom Line

A commercial real estate loan is one of the most powerful financial instruments available to business owners and investors. Used wisely, it can accelerate your wealth building, reduce your tax burden, and free you from the landlord relationship forever. Used carelessly, it can create serious financial strain.

That’s why working with an experienced CRE advisor before you approach a lender is always a smart move.