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What’s the Average Down Payment on a Commercial Property Loan?

What’s the Average Down Payment on a Commercial Property Loan?

Building Your Business
SouthEast Bank| February 17, 2023
What’s the Average Down Payment on a Commercial Property Loan?

While most people assume commercial property loans or commercial real estate loans are for property investment, they have a more specific use. Commercial properties are buildings or lots that can house a business and have the purpose of gaining a profit either through income or capital gain. They are popular investments for many people and are often necessary for small business owners looking into owning their property rather than renting from someone else.

To buy commercial properties, many rely on commercial property loans to finance their decision. Unlike a mortgage for a house, banks will often need a large down payment on a commercial property loan, making them more daunting to apply for.

However, with the right knowledge, a commercial property loan can be obtainable for those who are interested.

What is a Commercial Property Loan

A commercial property loan is a loan that is used to finance the purchase of a commercial property, such as office buildings, industrial areas, hotels, retail, warehouses, and more. The property must be used for business–it cannot be considered a residential property, like a single-family home or apartment.

Commercial property loans come in a few different types, but almost all will have terms from 5 to 20 years and also require on premise occupancy by at least 51% of the business. Compared to residential mortgages, which are typically 20 years, they have a much shorter amortization period.

Common types of commercial property loans

When looking for a commercial property loan, several factors should be considered, such as what type of commercial real estate loan you want to apply for and can qualify for.

The type of loan you have will significantly impact the loan’s terms, including your interest rate and the amount of down payment you will need.

Term loans

Term loans are what most people think of when they think of any type of loan. They are a lump sum provided to you by a bank or other financial institutions that will be repaid over time at agreed upon periods. In order to get a term loan for a commercial property, you must make sure to have excellent credit and solid financial history, as they tend to be harder to be approved for.

SBA loans

SBA loans are backed by the Small Business Administration and can be ideal for commercial properties. They tend to have lower interest rates compared to a traditional term loan and often have the lowest down payment requirements for a commercial property loan. However, they are not for everyone looking to buy commercial real estate; real estate investors are not eligible.

Business line of credit

Lines of credit can be excellent choices for funding a commercial property as they work similarly to credit cards but have a much higher funding amount. They can also allow you to use and reuse borrowed capital in some situations. The downside of a business line of credit is that they tend to have high-interest rates, but they are more flexible than a traditional term loan.

What Are the Requirements of a Commercial Property Loan?

Each type of loan will have different requirements. For example, an SBA 504 loan requires you to be a for-profit business and have a tangible net worth of at least $15 million. It’s important to understand the requirements of the type of loan you are applying for to ensure that you are qualified for it.

Beyond just the basic requirements, there are some general loan terms all lenders will look at when going over your commercial property loan application.

Business Finances – Ensure that your business finances are healthy and that you have the necessary cash flow to repay back the loan. Banks will also take a look at any debts the business might have and take that into consideration when approving your loan.

Business Credit Score – Just like people, businesses have their own credit. Before applying for a commercial property loan, check your score, as many loans will have minimum scores required. For example, the SBA 7(a) requires a minimum business credit score of 155.

Personal Finances and Credit Score – Even if your business is in order and you have the right cash flow, you’ll want to double-check your personal finances. Any foreclosures, defaults, or tax liens you might have had in the past may reflect poorly and harm your chances of getting the loan.

The Property – Commercial property terms loans work like mortgages; the property acts as the collateral to secure the loan. Lenders will want to know the property’s characteristics. They will also require you to occupy at least 51% of the building.

How Much of a Down Payment is Needed on a Commercial Property Loan?

The average down payment on a commercial loan is between 10% and 30% of the equity of the property. Typically, the down payment is around 25%. How much of a down payment you need for a commercial property loan will depend on the type of loan you are approved for and the type of building you want to buy.

Term loans will have higher down payment needs, towards the 25% to 30% range. Larger buildings, such as commercial buildings or industrial properties, will also tend to require high down payments. For example, if you are interested in purchasing a commercial property that is selling for $550,000, you will need at least $137,000 for a down payment using a traditional term loan.

The exception to a large down payment for a commercial property loan is if you use an SBA loan. With an SBA loan, you may need as little as 10% down.

Down payments on SBA loans for a commercial property

Many small businesses that are just starting or looking to expand their operations choose to go with an SBA 504 loan because of the smaller down payment requirement. This allows them to save the money that would have otherwise been allocated for the down payment towards something else, such as better equipment.

However, not all businesses qualify for SBA loans. In that case, it’s important to understand the terms of the loan you are applying for and the quality of the property you want to buy. Buying commercial property is a large investment and should be researched thoroughly.

LTV on Commercial Loans

Compared to traditional loans, commercial property loans have a higher loan-to-value or LTV cost – 60% to 85%. The loan-to-value ratio measures the amount of your mortgage to the value of the property and helps determine the risk when financing a commercial property. The higher the down payment, the lower the LTV. A lower LTV rate is more favorable as you are usually able to get better financing rates.

Determining the Down Payment on a Commercial Property

Before you determine the amount of down payment you need for a commercial property, it’s important to find out how much of an overall loan you will need and the estimated property value. Once you determine these numbers, you can start to estimate your down payment and begin researching the type of loan you will need to procure the property.

Commercial properties are a large investment for your business; finding the right loan and lender can take time. If you are looking to buy a commercial property, speak to one of SouthEast Bank’s personable lenders who can discuss your options with you.


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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.