What business owners should understand before applying for financing.

A commercial real estate (CRE) loan is a powerful financing tool for businesses that want to purchase property, build a new facility, renovate an existing one or refinance debt. If you’re new to CRE loans, here are five things you need to know.

A down payment is required

The down payment required for a CRE loan depends on the lender and the type of loan. Expect to put down between 10% and 30% of the borrowed amount. SBA loans tend to have the lowest down payment requirements.

The property serves as collateral

Lenders aim to minimize risk. One way they do this is by using the property being purchased as collateral. If the borrower doesn’t repay the loan, the lender can sell the property to recover losses on the unpaid loan.

In some cases, lenders ask for a personal guarantee; this means that you agree to repay the loan personally if your business cannot. As a result, assets such as your bank accounts, home, other real estate and investments could be used to satisfy the debt. A personal guarantee is most often required when a business is fairly new or lacks substantial assets to serve as collateral.

Lenders need business documentation

When commercial lenders ask for documentation, they’re not being nosy. They’re assessing the borrower’s ability to repay the loan.

When applying for CRE loan, you’ll have to provide tax returns, a business plan, an annual revenue report and how long you’ve been in business. Typically, businesses must have been in operation for at least two years to be eligible for a CRE loan.

Rates may be fixed or variable

Like home mortgages, loans to finance commercial properties come with either a fixed or variable rate. A fixed rate means predictable budgeting because the payment is always the same. Variable rates are tied to a benchmark, like the prime rate, and can go up or down periodically.

Fixed-rate CRE loans are often preferred when the debt will be repaid over a long time, like 10 or 20 years. Variable-rate loans may be more advantageous for short-term loans that will be paid back or refinanced within one to three years.

Plan on other costs related to the loan

When taking out a CRE loan, there are several additional costs to plan for beyond the purchase price, loan fees and interest rate to plan for. Appraisal and legal fees are part of nearly every deal. For new buildings, additions and renovations, it may be necessary to get environmental reports called environmental assessments. Older buildings may require inspections for asbestos and lead-based paint. Plan for these costs in your budget.

Learn more about commercial real estate loans

Every CRE loan is different. To get answers about a current or upcoming property purchase, reach out to a Consumers business expert. They can help you get the commercial real estate loan that supports your goals.

All loans subject to approval. Rates, terms, and conditions are subject to change may vary based on credit worthiness, qualifications, and collateral conditions.