If you’re planning to invest in commercial real estate, you’ll likely need financing. And if you don’t have perfect credit, you may be a bit hesitant or unsure of where to begin.

Bad credit can make your search for a loan — as well as the loan approval process — stressful and tiring, for sure, but don’t worry. Sure, you may not qualify for a high-LTV non-recourse loan, but there are still plenty of options available for commercial real estate investors.

This article highlights four commercial property loans with bad credit, along with the pros and cons of each.

Types of Loans for Borrowers With Poor Credit

There are several types of loans available for borrowers with bad credit. Each has its own benefits and drawbacks, so it's important to compare your options before choosing one. We’ve outlined four loan types below that you may be able to get approved for, regardless of your credit score.

Traditional Bank Financing

A bank loan is many investors’ first thought when it comes to getting a loan for a commercial property. And for good reason — bank loans are among the most commonly utilized financing instruments for commercial real estate, regardless of a borrower’s credit.

Will a bank extend financing to someone with bad credit? Many will not; it’s true.

But here’s where the sheer number of banks and credit unions gives you a serious advantage. Because there are just so many niche bank lenders with so many different requirements and levels of risk tolerance, bad credit isn’t necessarily a dealbreaker. Shopping your loan around could get you some surprising results.

One of the benefits of traditional bank financing is that it's typically easier to get approved for than other types of loans, provided you find the right lender, and approval timelines can be faster. On the other hand, interest rates can be higher, and the terms may be shorter than you'd like, potentially only up to five years.

CMBS Loans

A CMBS loan is a type of commercial real estate loan that is securitized and sold to investors on the secondary market. CMBS lenders pool together different mortgages and then securitize them into bonds. The bonds are then sold to investors, who receive periodic payments from borrowers. 

These loans are attractive to lenders because they have a more predictable repayment schedule than traditional loans. Lenders tend not to scrutinize borrowers too closely, instead prioritizing the asset and its cash flows in making a decision.

CMBS loans can be a good option for borrowers with bad credit. They offer more flexibility, lower interest rates, and do not require a personal guarantee. However, they are not available in all areas and may have higher fees than traditional loans. Borrowers should make sure to read the fine print and understand all fees before signing a loan agreement. 

Hard Money Loans

Hard money loans are a type of loan backed by collateral rather than your credit score. Similar to how CMBS loans work, this financing type prioritizes the property’s value and financials far more than a borrower’s creditworthiness.

One of the benefits of hard money loans is that they can be easier to get approved for than traditional bank loans. They also offer significantly more flexibility, and many lenders may be willing to waive certain fees or work with a borrower to restructure a repayment schedule.

That said, hard money loans are expensive. The convenience comes at a price: Expect significantly higher interest rates and origination fees. Also, while hard money financing offers flexibility, this generally does not extend to the loan’s term. Many hard money loans are used as bridge financing, with most loans’ terms ranging up to around two years.

Private Money Loans

Private money loans are another option for borrowers with bad credit. This type of financing comes from, as you’d expect, private lenders. These lenders are broadly far less limited by regulations or bureaucracy. In many respects, they are similar to hard money loans.

The main advantage of a private money loan is that it is based on the asset’s financial strength — not yours. Approvals are generally rather speedy, too. They also rarely have prepayment penalties, so once you’re able to lock in longer-term financing, you can do so right away.

The main drawback is in terms of debt service costs. Private money loans have relatively high interest rates, and this could make monthly payments rather expensive. They also often require significant down payments — you may not be able to get your loan at a loan-to-value ratio of above 65%. Finally, while loan terms may be extendable, this often comes with an extension fee, adding to your overall debt cost.

In Conclusion

Bad credit can make it difficult to get approved for a loan, but there are still some options available. Traditional bank financing, CMBS loans, hard money loans, and private money loans are all options that you may be able to get approved for, even with bad credit.

That said, they do come with costs, from higher interest rates to shorter terms. Even if you have a solid investment strategy for your commercial real estate, finding a loan with less-than-ideal credit can be a daunting task. We can help you with that — fill in your details in the form below, and we’ll get to work.