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What is a commercial real estate loan?

Find out which loan types work for your business

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If you own a business and are looking to open a storefront, or simply want to expand your footprint, getting a commercial real estate loan may be your next step.

There are several types of loans to choose from, with varying terms and rates, depending on your business needs. Some commercial loans are specific to owner-occupied businesses, while others are designed for commercial real estate investors that lease out commercial space.

In this article, we’ll dive into the details of commercial real estate loans, including how they work, the different types of loans, how to qualify for one and some of the pros and cons of these loans.

Key insights

  • Commercial real estate loans help businesses purchase buildings or other real estate.
  • These loans typically come with shorter loan terms and higher interest rates than residential real estate loans.
  • Commercial real estate loans can be used for owner-occupied buildings, or for investors to lease out commercial space.
  • Expect a longer amortization schedule with commercial real estate loans.

How do commercial real estate loans work?

Commercial real estate loans are mortgages that are secured by physical property, including office buildings, restaurants, shopping centers or other commercial buildings. They are used to purchase or improve commercial property for the purpose of producing income.

Michael Morris, a commercial real estate agent and owner of Pursuit of Passive Income, a personal finance website, shared the most common ways these loans are used:

  • Property acquisition. “Commercial real estate loans are commonly used to purchase properties such as office buildings, retail spaces, industrial warehouses, hotels, apartment complexes and other income-generating properties.”
  • Development and construction. “Developers and investors often rely on commercial real estate loans to finance the construction or renovation of commercial properties. These loans can cover the costs of land acquisition, construction materials, labor, permits and other expenses associated with the development process.”
  • Expansion or upgrades. “Existing businesses may seek commercial real estate loans to expand their operations by acquiring additional space, renovating existing properties or upgrading facilities to accommodate growth.”

Types of commercial real estate loans

There are several types of commercial real estate loans to choose from, depending on your needs and business qualifications.

Here are the most popular commercial real estate loans and what they are used for.

Many private lenders and banks offer conventional commercial loans for purchases of business property.

“These loans are similar to residential mortgages but specifically designed for commercial properties,” said Morris. “Borrowers receive a lump sum of money that is repaid over a fixed period, typically five to 25 years, through monthly installments. The loan is typically secured by the property being financed.”

The Small Business Administration (SBA) offers commercial real estate loans, with the most popular being the 7(a) loan. Businesses can borrow up to $5 million for real estate purchases, but loans can also be used for the purchase of equipment, machinery, furniture, fixtures, supplies or materials, short- and long-term working capital and other use cases.

SBA 7(a) loans are known to have some of the lowest interest rates and favorable repayment terms, with terms up to 25 years in length.

Bridge loans are designed to help “bridge the gap” in financing to help businesses acquire a property before they have financing in place.

“Bridge loans provide short-term financing to bridge a gap between the purchase of a new property and the sale of an existing property or the arrival of permanent financing,” said Morris. “These loans are useful for borrowers who need immediate funding or want to seize investment opportunities quickly. Bridge loans often have higher interest rates and shorter terms.”

Construction loans are typically used by businesses to improve a property or fund the construction of a new building.

“The loan disbursements are typically made in stages, known as draws, based on the completion of specific project milestones,” said Morris. “Once the construction is complete, the loan may be converted into a traditional commercial mortgage or refinanced.”

» MORE: How do construction loans work?

Mezzanine loans are similar to a second mortgage on a home.

“Mezzanine loans are a form of financing that fills the gap between the borrower's equity and the senior debt (the primary loan),” said Morris. “These loans are often used to fund larger projects or provide additional capital. Mezzanine loans are secured by the equity in the property and can have higher interest rates and additional fees.”

How to qualify for a commercial real estate loan

To qualify for a commercial real estate loan, you need to be well suited to carry the debt and have your business finances in order.

“Qualifying for a commercial real estate loan typically involves a thorough evaluation of both the property being financed and the borrower's financial capacity,” said Morris.

There are a few key criteria:

  • Creditworthiness. Your personal and business credit must be in good standing. “A higher credit score demonstrates responsible financial management and increases the likelihood of approval,” said Morris.
  • Financial stability. Lenders “analyze factors such as business revenues, cash flow, profitability and debt-to-income ratio,” said Morris. This includes evaluating your debt service coverage ratio (DSCR), which is your business’s available cash flow to cover debt. To calculate, divide your net operating income by your debt payments. A high ratio indicates a strong ability to pay back debts and will help you qualify.
  • Loan-to-value ratio. Most commercial real estate loans require a higher down payment than a residential mortgage. “Having a substantial down payment, typically ranging from 15% to 35% of the property's value, shows your commitment and reduces the lender's risk,” said Morris. This usually results in a loan-to-value ratio (LTV) of 65% to 85%.
  • Documentation. “Prepare all necessary documents, including financial statements, tax returns, bank statements, lease agreements (if applicable) and legal documents related to the property,” said Morris. “Providing accurate and organized documentation helps streamline the loan application process and instills confidence in lenders.” The documentation required varies by lender, so make sure to get a checklist of documents needed to complete your loan application.

Lenders may also dive deeper into your business financials and the condition and type of property you are looking to purchase. All of these details can factor into the loan amount and interest rate you qualify for.

» MORE: Personal loan for business: what you should know

Pros and cons of commercial real estate loans

Commercial real estate loans can allow businesses to expand their footprint and purchase expensive commercial buildings with favorable loan terms. But they often require a large down payment, and interest rates can be higher than a standard mortgage.


  • Access to large amounts of funding for business real estate purchases
  • Terms up to 25 years in length
  • Expand or improve your business location(s)
  • Loan interest is tax deductible


  • Stringent qualification process
  • Interest rates can be high
  • Defaulting on the loan can hurt your business

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    How long does it take to get approved for a commercial real estate loan?

    Commercial real estate loans can take a while to fund as lenders need to review both the personal and business finances and credit history of the borrower. Application to closing can take multiple months, depending on the property, the business, the lender and the type of loan. Ask lenders about the expected time to close when shopping for a commercial real estate loan.

    Can I refinance a commercial real estate loan?

    Yes, you can refinance a commercial real estate loan.

    “Property owners may choose to refinance their commercial real estate loans to take advantage of better interest rates, adjust loan terms or release equity from their properties,” said Morris. “Refinancing can help lower monthly payments, improve cash flow or provide capital for other business purposes.”

    Are there any tax benefits associated with commercial real estate loans?

    There are several tax benefits with commercial real estate loans that help lower your business tax burden. Mortgage interest is generally tax-deductible, as are expenses related to acquiring the loan (such as loan origination fees). Commercial properties also allow a depreciation deduction, and you can deduct property expenses.

    “Operating expenses related to the commercial property, such as property taxes, insurance premiums, maintenance costs and management fees, are generally tax-deductible,” said Morris, making them a great way to lower your business taxes.

    Bottom line

    Commercial real estate loans are widely used to grow businesses and acquire commercial property for investment purposes. Whether you’re looking to expand your business or are an investor looking to lease out space in a commercial building, using a commercial real estate loan can help you buy your next property.

    But make sure your finances are in order, as the application process can be lengthy. Plus, you’ll need to bring a lot of cash to the table, as most commercial lenders require a large down payment.

    Lastly, hire a good supporting team to help you make the best decision for your business, which may include a licensed tax professional and business lawyer.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Small Business Administration, “7(a) loans.” Accessed June 27, 2023.
    2. Small Business Administration, “Terms, conditions, and eligibility.” Accessed June 27, 2023.
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