How to Finance a Commercial Property Purchase

The main paths buyers use, and the questions worth asking before you choose one.

Once you have decided buying makes more sense than leasing, the next question is how to finance it. Here are the most common paths business owners and investors use.

Conventional Commercial Loan

Typically requires 10 to 40 percent down, with terms that vary based on your financials, the property type, and the lender you work with. This is the most familiar path for buyers with strong financials and established credit.

SBA 7(a) or 504 Loan

SBA (Small Business Administration) loans are partnerships between the lender, the Federal Government, and the borrower. This program allows a borrower to put as little as 10 percent down with a fixed interest rate, making it one of the more accessible options for owner-occupied purchases. It requires at least 51 percent owner-occupancy of the building. SBA Veteran loans are also available for qualifying buyers.

Owner-Will-Carry

Owner-will-carry, also known as seller financing, is when the seller finances the purchase directly rather than a bank. This can mean more flexible terms, but it depends entirely on what the seller is willing to offer, so it is worth asking about early in negotiations. Sellers typically want a sizeable down payment of at least 25 percent down, with a balloon in 5 to 10 years, at which point the buyer would need to refinance the loan into another loan type. Most sellers do not want to carry a note for decades.

Hard Money Loan

Higher interest rates and typically 2 to 8 points due at closing, usually requiring around 30 percent down. This tends to work best as a short-term bridge rather than a long-term financing strategy.

Questions To Ask Any Lender

There are a number of questions a borrower should ask a commercial lender to ensure you are comparing apples to apples and understand what type of loan you are obtaining. Questions like:

• What is the loan-to-value ratio?

• What is the minimum down payment?

• What is the amortization schedule versus the real loan term?

• Is a 5, 7, or 10-year loan a balloon payment or a rate adjustment?

• Are there prepayment penalties if you sell or refinance early?

It may be worth speaking with at least three to five lenders before committing to one. Programs, rates, and flexibility vary more between lenders than most buyers expect, and the right fit depends on your specific deal, your personal and business finances, and the lender themselves, not just your credit score.

As a boutique, full-service brokerage, Navigate works alongside you through the financing conversation, not just the property search. If you are weighing your options, schedule a consultation to talk through what makes sense for your situation.