2017 Guide to Finding the Best Commercial Loan Rates
With how complicated commercial loans have become over the years, it’s a question that’s become all too common: “How do I find the best commercial business loan rates?”
And the answer, albeit a pretty simple one, depends on multiple factors, including the size of the loan you need and your company’s credit history and assets.
But before you can start searching for current commercial lending rates, you’ll need to decide what type of loan you’re going to take and where you’re planning on getting it from.
As far as the loan itself is concerned, there are typically four different types you can choose from, depending on your finances and personal preference: commercial loans, fixed-term loans, variable-rate loans, and balloon term loans.
Fixed-Term Loans & Commercial Loans
The most common loan and also probably the safest option for a commercial loan is the fixed-term loan. This type of loan is exactly what the name implies; both the monthly payments and commercial loan interest rate are on a fixed term for the duration of the loan.
Consistency with monthly payments and a preset commercial interest rate allows companies and accounting departments to be aware of exactly what they’re spending each month, helping them avoid unexpected costs down the road.
Although, there are also some disadvantages to fixed-rate loans. For example, if commercial lending rates nationwide start to plummet, guess what? You’re out of luck, because your commercial loan interest rate is locked in on your fixed-term loan.
And unfortunately, no lending agency is going to lower your rate just because the current commercial loan rates are falling. After all, just like you, they aren’t in the business of giving away money!
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So if you think the commercial loan rates are going to stay fairly stable or if you prefer to be on the safe side, a fixed-rate loan is usually a safe and logical choice. But if you think there is a good chance that commercial business loan rates will fall at some point during the duration of your loan, you may be better off going with a variable-rate loan.
Just like what we alluded to above, you can also decide to go with a variable-rate loan. A variable-rate loan is interesting because the rate for commercial loans varies with market conditions, which can obviously be a really good thing for you—or a really bad one. It all just depends on the market, and to a lesser extent, your luck. These loans also typically have lower commercial loan interest rates at closing than fixed rates.
But on the other end of the spectrum, if the commercial loan rates fall across the board, your rate falls too. And when the rate falls, that’s almost like money back in your company’s pocket.
Just be sure to have a plan in place for both a rise and fall in the current commercial loan rates, so that in the case of a rise, the increase in cost won’t slow business expansion or affect business operations. If you aren’t comfortable going with a variable-rate loan for the life of the loan, you can also choose to start with a variable-rate loan that ultimately rolls into a fixed-rate at a later date.
Balloon Term Loan
Another type of loan used commercially is a balloon term loan, where the payment period is amortized over a longer duration than the loan itself. Then when the payment period ends, the amount owed is either due in full or can be added on to another loan agreement, which adds a fair amount of risk.
The main benefit with these obviously is that since part of the payment is pushed beyond the duration of the loan itself, the commercial loan interest rates will be significantly lower than a fixed-payment loan.
But these loans also come with significant risk, as many borrowers are unable to save up enough money to make the balloon payment at the loan’s maturity. So they are forced to either re-qualify for the loan or refinance it at after the balloon term.
If the borrower has any financial woes or issues with their business or industry preceding the balloon period, the lender is likely to up the commercial loan interest rate.
Or instead, they could just deny refinancing altogether, meaning the property could be in jeopardy of foreclosure. So if you do go with a balloon term loan, make sure you are able to pay off the full amount when it is due. Otherwise, you could end up having to refinance the loan with much higher commercial lending rates, causing you some serious financial headaches down the road!
An interest only loan is another possible option, where all payments made go toward the interest. However, these loans are not overly common, since they’re only useful when you are unable to make payments on the principal. An interest-only loan can also be refinanced into a fixed-rate loan, although that puts you at the mercy of whatever the current commercial loan interest rates are.
If you do take this route, be sure to make principal reductions when you can afford to, because after all, it’s going to have to get paid off somehow eventually! (Or, at the very least, paired in with another loan product.)
Applying for a Commercial Loan
Now that you have a better idea of the different types of loans out there, the next step is to figure out where to apply in order to get the best commercial loan rate for your business.
And after reading about the types of loans above, you probably aren’t surprised to see that most people choose to go with the fixed-rate loan. It’s obviously much easier for businesses to plan ahead when both the payments and commercial loan interest rates are always the same.
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But regardless of what works for most businesses, you have to decide which type of commercial loan best suits the needs of yours. And once you determine that, it’s time to decide where you want to get the loan from. There are also several options for this, so you’ll want to do a little research here, as the commercial lending rates vary from institution to institution.
Life Insurance Companies
One of the best options, at least as far as commercial business loan rates are concerned, is probably to get a loan from a life insurance company. And yes believe it or not, life insurance companies, like MetLife, Prudential, and some others, offer commercial loans.
Although despite offering some of the best commercial loan rates, you have to qualify first, which can be a tall task because typically these companies are incredibly picky about who they select. Life insurance companies usually do not give out loans of less than $5 million, and they also prefer that you have a young, fully-leased property, and that your loan-to-value ratio does not exceed a certain percentage. But if you do qualify, you’ll get the benefit of some of the lowest commercial lending rates out there, which currently sit between 3.4% and 4.3%.
A more realistic option is for you to actually get approved for a loan with reasonable commercial loan interest rates is to go through a conduit. A conduit is just a mortgage banking company that originates loans, typically fixed-rate loans set on very strict guidelines.
The best aspect of conduits is that they typically offer very low commercial loan interest rates (between 3.25% and 5%), which obviously make them a popular option for loans. However, most conduits prefer relatively large commercial loans like just life insurance companies—typically more than $5 million—and the loans also often come with large prepayment penalties.
Commercial Bank or Credit Union
Another option for getting some of the best commercial loan rates available, and probably the easiest place to get one, is from a commercial bank.
Although, if you plan on borrowing from a bank, you will need to meet their terms. For most standard commercial loans where the borrower is buying new commercial property, banks typically require a 20–25% deposit. And since commercial properties usually aren’t cheap, that’s always something to consider: a 20–25% down payment can equate to an awful lot of cash.
The good news is that commercial bank loan rates are also about as low as you can get, and banks also like lending to businesses that are nearby. So if you have any trouble getting your bank to approve your loan, try looking at some of the larger banks near the property you’ve purchased or plan to purchase to see if their commercial bank loan rates are comparable.
Or, although it’s still slightly uncommon, you can also get commercial loans from credit unions. While they typically don’t like to make a habit of giving them out, they do make up close to 5% of the total commercial mortgage loan market.
And just like banks, they like working with businesses that are close by, so make sure to check out some of the commercial lending rates at your local credit unions. Whether you decide to go with a bank or credit union, the current commercial bank loan rates are relatively low and typically sit between 3.45% and 6%, so neither is a bad option if you can qualify.
Private Money Commercial Lender
But even with all of the different options above, there’s a chance that you may not qualify for any of them. Luckily, there’s another option even if you can’t qualify for a commercial loan at your local bank or credit union. You can also try calling a soft or hard money commercial lender.
Most non-bank lenders have less stringent requirements as far as credit is concerned, which often mean their commercial lending rates are a few percentage points higher than banks or life insurance companies.
And while the commercial loan rates offered by private money lenders may not be quite as favorable as those of life insurance companies or corporate banks, they have gotten significantly more affordable over the years, and for the most part, are very competitive with commercial loan rates from most lenders. The current soft money lender rates sit between 6 and 18%, while hard money lender rates sit between 10 and 19%.
Finding the Best Commercial Lending Rates
So as you can see, there really isn’t a one-size-fits-all solution to getting the best commercial loan interest rate. You’ve got a lot of different options available, and the commercial loan interest rate you ultimately get really all depends on a multitude of factors, including your company’s credit history, your assets, and your own personal preference.
The best thing to do is to shop around, because the current commercial loan rates constantly fluctuate. So make sure to check on the commercial business loan rates (and commercial bank lending rates) at every bank, credit union, or any other institution near you that offers a commercial loan before making your decision on where to apply.
AdvisoryHQ (AHQ) Disclaimer: Reasonable efforts have been made by AdvisoryHQ to present accurate information, however all info is presented without warranty. Review AdvisoryHQ’s Terms for details. Also review each firm’s site for the most updated data, rates and info. Note: Firms and products, including the one(s) reviewed above, may be AdvisoryHQ's affiliates. Click to view AdvisoryHQ's advertiser disclosures.
AdvisoryHQ (AHQ) Disclaimer:
Reasonable efforts have been made by AdvisoryHQ to present accurate information, however all info is presented without warranty. Review AdvisoryHQ’s Terms for details. Also review each firm’s site for the most updated data, rates and info.
Note: Firms and products, including the one(s) reviewed above, may be AdvisoryHQ's affiliates. Click to view AdvisoryHQ's advertiser disclosures.