Everything You Need to Know About Commercial Loan Down Payments
Whether you’re looking for a commercial real estate loan or a commercial loan for a business, you’ll need a significant down payment to get approved. Down payments are required for nearly all types of commercial real estate loans and business loans, with required down payments generally varying between 20-40%, with some exceptions.
In this article, we’ll review the various down payment requirements for different types of commercial loans and discuss how to acquire the funds for both commercial real estate loan down payments and small business loan down payments.
What Are The Different Types of Commercial Loans?
Before diving into commercial property loan requirements let’s review the different types of commercial loans. Common commercial loan types include:
Commercial Real Estate Loans: Commercial real estate loans are used for the acquisition, refinancing, and construction of multifamily and commercial properties. Lenders that typically offer commercial real estate loans:
Banks
CMBS Lenders
Private Lenders
Hard Money Lenders
HUD/FHA Multifamily
Fannie Mae/Freddie Mac Multifamily
SBA Loans: SBA loans are backed by the U.S. SBA (Small Business Administration) and can be used for working capital, commercial property, business acquisitions, and other purposes.
Business Lines of Credit: This type of loan is similar to a credit card, as it allows borrowers to take out funds as needed, but lines of credit generally have much lower rates.
Term Loans/Short-Term Loans: These are generally short-term business loans with high-interest rates.
What Factors Influence Commerical Loan Down Payment Requirements?
Some of the factors that influence down payment requirements for commercial real estate loans and commercial business loans include:
Credit score (personal and business)
Borrower history/experience
Borrower/business financials
DSCR/DTI (debt service coverage ratio/debt-to-income ratio)
Loan type
Loan use (i.e. working capital, real estate, construction)
Lender
Loan sponsorship (loans may be offered with lower down payments if there is a qualified co-signer)
In general, borrowers with higher credit scores, more experience, and those utilizing loans for commercial property acquisition or refinancing, rather than working capital, will face lower down payment requirements.
How To Get The Funds For A Commerical Loan Down Payment
If you don’t already have the funds for a commercial loan down payment, there are various ways to raise the funds. Some of the most popular include:
Traditional Investors: If you plan to utilize a commercial real estate syndication structure for your deal, you can raise money from accredited investors for your down payment. However, there are a lot of legal restrictions around real estate syndications, and you could get in trouble for accidentally marketing to non-accredited investors, so it’s always important to utilize a commercial real estate lawyer before raising capital. Businesses can also use syndications to fund their down payments, but this is significantly rarer.
Crowdfunding: While crowdfunding is usually used to fund somewhat mature businesses and real estate deals, it can also help fund the down payment for a commercial real estate loan or business loan. For commercial real estate loans, crowdfunding is somewhat similar to commercial real estate syndication, as investors will provide money upfront in exchange for shares in your property. However, crowdfunding has several benefits, as it can be legally advertised to the public, including non-accredited investors. Plus, investments can often be as little as $5,000, greatly widening the pool of potential investors. Funds from crowdfunded investments in businesses can also be used to fund down payments for business loans, installment loans, or lines of credit.
Personal Loans: While not ideal, you can potentially fund all or part of your commercial loan with a personal loan. Most personal loans have much higher interest rates than commercial loans, so this can get expensive. In addition, some lenders may not like this (especially banks), as it makes you somewhat riskier borrowers.
Home Equity Loans: If you have a lot of equity locked up in your home, a home equity loan could be a great source of capital to help fund your down payment. Again, some commercial lenders (like banks) may not like this, but others may not care.
Commercial Equity Loans/Cash-Out Refinances: If you own another commercial property with enough equity in it, you can also use a commercial property equity loan or a commercial cash-out refinance to take cash out, which you can use for the down payment for a new property or the down payment for a commercial business loan. Commercial real estate and small business lenders may want an SREO, or schedule of real estate owned, which lists all real estate a borrower owns as well as any loans on each property, so they’ll know how you got the money, which, again, could be a turn-off for some lenders.
Real Estate Sponsors: As we’ll get to more later, a real estate sponsor is an individual who co-signs a commercial property loan that a borrower would not be able to get otherwise due to net worth or credit issues. In addition to co-signing a loan, a sponsor may be willing to front the money for a down payment.
Bank Loan Down Payment Requirements
Since bank loans typically provide maximum LTVs of between 70-75%, the commercial real estate loan down payment requirements for banks are typically between 25-30% of the total loan amount. Business loan down payments are more variable and depend on the individual lender.
Private and Hard Money Lender Down Payment Requirements
Private and hard money lenders sometimes fund up to 80-85% LTV (though most stick to 75%), so minimum down payment requirements are typically between 15-25% of the total loan amount. However, unlike traditional commercial mortgage loans, hard money loans may have more flexible terms and may allow borrowers to put less money down in certain scenarios, such as when a loan is cross-collateralized by the equity in another commercial property.
CMBS Loan Down Payment Requirements
CMBS loans for commercial properties generally offer LTVs up to 75%, so down payments are typically 25% of the total loan amount. However, as previously touched upon, higher-risk commercial property loans, including financing for hotels and hospitality properties (or unique property types, like marinas) may only be offered to finance up to 65% LTV, which would lead to a required down payment of 35%.
HUD Multifamily, Fannie Mae Multifamily, and Freddie Mac Multifamily Down Payment Requirements
HUD multifamily loans are non-recourse loans for apartment buildings insured by the U.S. government. These multifamily loans typically require minimum down payments of 15% for market-rate properties, 12.5% for affordable properties, and 10% for rental assistance properties. HUD apartment loans generally have the lowest rates and longest terms of any type of commercial mortgage, but, unlike other types of commercial property loans, they do require HUD mortgage insurance.
Fannie Mae and Freddie Mac multifamily loans are non-recourse apartment loans issued by the GSEs (government-sponsored enterprises) Fannie Mae and Freddie Mac and generally require minimum down payments of 20-25%.
SBA Loan Down Payment Requirements
SBA loans come in two main varieties: SBA 7(a) loans, which can be used for almost all legitimate business purposes (including working capital), and SBA 504 loans, which can typically only be used for heavy equipment and majority owner-occupied commercial real estate.
SBA 504 loans offer LTVs of up to 85-90% of appraised business assets, so required down payments may be as little as 10-15%. Generally, the 504 loan program offers 90% LTC (loan-to-cost) for commercial construction projects, so loans intended for other types of uses may be restricted to 85% LTV. In comparison, SBA 7(a) loan generally can offer LTVs up to 85% of approved collateral, so required down payments may be as little as 15%.
Business Line of Credit, Term Loan, and Short Term Loan Down Payment Requirements
Business lines of credit, term loans, and short-term loans typically do not require a down payment. However, some lenders may require a small down payment for larger or lower-interest loans.
Commerical Loan Down Payment Assistance
Commercial loan down payment assistance is incredibly rare, but there are scenarios in which lenders will have more lenient rules about how a down payment is acquired.
For example, SBA loans have relatively loose rules regarding how a borrower acquires a down payment. For example, the SBA 7(a) loan program allows down payments to be gifted to a borrower by a friend or family member. In addition, the SBA 504 loan program allows borrowers to borrow their down payment, provided they can provide that it will not negatively impact their business.
Getting A Commercial Real Estate Loan With No Down Payment
People often wonder whether there’s any way to get a commercial loan without no down payment. In most cases, the answer is no. However, there are a few exceptions to this rule.
For instance, SBA 7(a) loans now offer 100% financing for qualified businesses looking to acquire, build, or owner-occupied refinance commercial properties. However, qualifying for 100% SBA financing is significantly harder than getting approved for a traditional SBA loan.
Typical application requirements include:
Great personal and business credit
Significant collateral
DSCR of 1.25x+
Business must have stable cash flow (generally for at least 18 months)
General use/multi-use buildings only (i.e. no theme parks, marinas, etc.)
The building must occupy at least 51% of the property
100% LTV SBA 7(a) loans for construction projects are even harder to qualify for, as they require that a business has incredibly strong financials. In addition, the business will need to occupy at least 60% of the finished structure (as opposed to the 51% minimum for property acquisitions.)
It should be noted that SBA loans with no down payment are only for owner-occupied commercial real estate and generally aren’t available for other uses, such as acquiring businesses.
In addition to SBA lenders, some hard money and private money lenders may provide 100% financing if the loan is cross-collateralized with another rental property in which the owner holds significant equity.
In Conclusion: Commercial Loan Down Payment Requirements Vary Significantly
As you can see, different types of loans and different types of lenders have drastically different down payment requirements. Government-backed loans like SBA loans for small businesses, Fannie Mae Multifamily loans, Freddie Mac Multifamily loans, and HUD multifamily loans generally have the lowest down payment requirements. However, these loans have strict qualification requirements and are only provided to investors and businesses with great credit and strong financials.
In contrast, a borrower with poor financials and less than stellar credit attempting to get a commercial property loan or small business loan from a bank or hard money lender may be required to provide a substantial down payment, sometimes as much as 40% or more.
Just as there are many loans and loan types, there are equally as many ways to raise money for a down payment, from taking out a home equity loan to crowdfunding, and each has its own benefits and drawbacks.
In the end, while down payment requirements vary, prospective borrowers who know what to expect will be far better off when it actually comes time to apply for a commercial loan.