How Commercial Loans Work: A Plain-English Guide

Commercial vs. residential: the big differences

A home mortgage is built around you: your W-2 income, your credit and a standardized set of rules. Commercial lending is built around the deal. The lender asks whether the property or business can carry the debt, and whether you have a believable plan.

• Borrower is usually an LLC or corporation, often with a personal guarantee
• Terms are shorter — months to 10 years is common, versus 30 years
• Underwriting focuses on income, value and experience
• Rates, fees and structure are negotiated deal by deal

Who makes commercial loans

Banks and credit unions offer the lowest rates but move slowly and have strict boxes. SBA lenders offer long terms for operating businesses. Private and debt-fund lenders move fast and lend on property value, at a higher cost. Agencies, CMBS and life companies serve larger stabilized properties.

Picking the right lender type is often the biggest decision you'll make — and it's where an experienced advisor saves the most time.

The numbers that decide your loan

• Loan-to-Value (LTV): how much you borrow compared to the property's value
• Loan-to-Cost (LTC): for construction, how much of the total project cost the loan covers
• DSCR: whether the property's income covers its payments
• Credit and liquidity: your track record and cash on hand
• Experience: how many similar projects you've completed

From first call to closing

Private loans can close in a couple of weeks. Bank and SBA loans often take 45–90 days. Having your documents organized before you start is the single best way to move faster.

• Share the deal: property, purchase price, budget and plan
• Receive indicative terms or a term sheet
• Submit documents and pay for third-party reports (appraisal, title, sometimes environmental)
• Underwriting and final approval
• Closing and funding