Commercial Real Estate Financing: How to Fund Your Next Property

Commercial real estate is one of the biggest capital decisions you will make as a business owner. Whether you are buying your first owner-occupied space, expanding into a second location, or acquiring an income-producing property, understanding the loan structures available to you matters. A well-structured deal versus a poorly structured one can mean hundreds of thousands of dollars over the life of the loan.

This guide covers the primary CRE financing options, what lenders evaluate during underwriting, how to maximize your leverage, and how to set your deal up for approval.

If you want to rate-shop first, start with current commercial real estate loan rates.

Types of Commercial Real Estate Loans

There is no single "commercial real estate loan." The right structure depends on the property type, your intended use, your financial profile, and how fast you need to close.

SBA 504 Loans

The SBA 504 program is built for owner-occupied commercial real estate. It offers the lowest down payment (as little as 5%), long fixed-rate terms, and competitive rates because the SBA guarantees a portion of the loan.

The 504 structure splits the financing three ways: a conventional lender covers 50% (first lien), a Certified Development Company (CDC) covers up to 40% (second lien, SBA-guaranteed), and you put down as little as 5% on qualifying deals. The bank gets a conservative first-position loan, which is why they are willing to participate at favorable rates.

SBA 7(a) Loans for Real Estate

The SBA 7(a) program also works for commercial real estate, with up to $5 million in financing and terms up to 25 years. The advantage over 504 is flexibility: you can bundle working capital with the property purchase, and the process is often faster.

The downside is that rates are typically variable (prime + spread), and the total loan amount caps at $5 million compared to the 504's ability to finance larger total project costs.

Conventional Commercial Mortgages

Traditional bank financing without SBA involvement. These loans close faster (30-45 days), have fewer restrictions, and work for both owner-occupied and investment properties.

You pay more upfront (higher down payment) and may get higher rates. But conventional CRE loans skip the SBA guarantee fees, require less paperwork, and close faster. For experienced investors with strong financials, conventional is often the more efficient route.

Bridge Loans

Short-term financing (6-24 months) used to acquire or reposition a property before locking in permanent financing. Bridge loans close fast (1-2 weeks) but carry higher rates (8-14%) and are designed to be refinanced, not held.

Common use cases: buying a property at auction, funding renovations before stabilization, or closing quickly when a conventional loan cannot meet the seller's timeline.

What Lenders Evaluate in CRE Deals

Commercial real estate underwriting looks at both you and the property. Unlike residential mortgages, CRE loans put significant weight on whether the property can generate enough income to cover the debt.

Debt Service Coverage Ratio (DSCR)

DSCR is the most important number in CRE lending. It measures whether the property (or your business) generates enough income to cover the loan payments.

DSCR = Net Operating Income / Annual Debt Service

Most lenders require a minimum DSCR of 1.20x to 1.35x, meaning the property or business needs to generate 20-35% more income than the annual loan payment. Higher DSCR means lower risk for the lender and better terms for you.

Loan-to-Value Ratio (LTV)

LTV measures the loan amount against the property's appraised value. Lower LTV means more equity and less risk.

• SBA 504: Up to 95% LTV (5% down on qualifying deals)
• SBA 7(a): Up to 95% LTV
• Conventional: Typically 70-80% LTV
• Bridge: 65-75% LTV

Property Type and Location

Lenders have different appetites for different property types. Here is the general hierarchy from easiest to hardest to finance:

1. Multi-family (5+ units): Easiest. Stable cash flow, established underwriting models.
2. Office and retail (occupied): Moderate. Depends on tenant quality and lease terms.
3. Industrial and warehouse: Growing demand. Lenders are increasingly favorable.
4. Mixed-use: Moderate to difficult. Depends on the commercial/residential split.
5. Special-use (restaurants, gas stations, car washes): Harder. Limited alternative uses make lenders cautious.
6. Land and construction: Hardest. Highest risk, requires specialized lenders.

Location matters a lot. Lenders look at market fundamentals: population trends, employment data, vacancy rates, and comparable sales. A strong property in a weak market will face tougher underwriting than a modest property in a growing metro.

Borrower Financials

Even though CRE loans lean heavily on the property, your personal financials still matter. This is especially true for owner-occupied and SBA-backed loans.

• Personal credit score: 680+ preferred for SBA; 700+ for the best conventional terms
• Liquidity: Lenders want to see 6-12 months of reserves after closing
• Net worth: Should ideally be at or above the loan amount
• Experience: Prior real estate or industry experience strengthens the application
• Personal guarantee: Required for most CRE loans under $10M

Required Documentation

CRE loan applications require documents on both you and the property. Having these ready before you engage a lender saves serious time.

Borrower Documents

• Personal and business tax returns (2-3 years)
• Personal financial statement
• Business financial statements (P&L, balance sheet)
• Business bank statements (3-6 months)
• Business debt schedule
• Resume or CV (for owner experience)

Property Documents

• Purchase agreement or letter of intent
• Property appraisal (lender will order this)
• Environmental assessment (Phase I, sometimes Phase II)
• Rent roll and lease copies (for income-producing properties)
• Operating statements for the property (2-3 years if available)
• Property condition report

How to Maximize Your Leverage

How you structure a CRE deal can mean the difference between a 5% down payment and a 30% one. Here are the main strategies:

1. Use SBA programs: If the property is 51%+ owner-occupied, the SBA 504 or 7(a) program lets you put as little as 5% down versus 20-30% conventional.
2. Seller financing: Some sellers will carry a second-position note, reducing your out-of-pocket requirement.
3. Negotiate seller concessions: Credits for repairs, closing costs, or prepaid expenses reduce cash needed at closing.
4. Show strong DSCR: If your business generates significantly more income than the debt service requires, lenders may approve higher LTV.
5. Cross-collateralize: If you own other real estate with equity, some lenders will accept it as additional collateral to offset a smaller down payment.

The CRE Loan Process

Why Work with a Broker for CRE?

Commercial real estate deals are complex. Different lenders specialize in different property types, markets, loan sizes, and structures. A lender that aggressively finances multi-family in the Southeast may have zero interest in a mixed-use property in the Midwest.

Halford Capital works with established CRE lenders, including national banks and private credit institutions with dedicated commercial real estate divisions. We match your deal to the lender whose criteria fit your property type, market, and financial profile, so you are not burning weeks on lenders who were never going to approve your deal.

Whether you are looking at an SBA 504 with as little as 5% down or a conventional mortgage for an investment property, start your application and we will connect you with the right lender for your deal.