A commercial equity loan lets you borrow against the equity in commercial property that you or your business already owns, meaning the difference between what the building is worth and what is still owed on it. It usually comes in one of three forms: a commercial equity line of credit you draw on as needed, a closed-end loan that sits in second position behind your current mortgage, or a cash-out refinance that replaces the mortgage with a larger one and pays you the difference. Lenders size the loan from an appraisal and a loan-to-value limit, check that the business's cash flow covers the new payment, and commonly take weeks to close because of the appraisal, title and environmental work. Today Capital Group places equity-backed loans and lines with lenders in our network, and the lender makes the credit decision.
How a commercial equity loan works
Equity is the part of the property you own outright. If your building would sell for $1,200,000 and you owe $500,000 on the mortgage, you have $700,000 of equity. A lender that makes a commercial equity loan takes a lien on the property, recorded as a mortgage or deed of trust, so the building secures the debt in the same way it secures your original mortgage.
A commercial property loan, business property loan or business real estate loan usually means a loan to buy a building, while a commercial equity loan borrows against one you already own. Equity based lending covers any loan sized mainly on the value of an owned asset, and it belongs to the broader family of asset based loans, which can also be secured by receivables, inventory or equipment.
Business lenders that don't take real estate often file a UCC financing statement against the business's assets instead. Our guide to how a UCC lien works explains that filing, so you can check which liens already exist before you add another.
Three ways to borrow against commercial property
Each structure treats your existing mortgage differently, and that often decides which one fits.
| Structure | How you receive the money | What happens to your current mortgage | Often used for |
|---|---|---|---|
| Commercial equity line of credit | Draw what you need up to a limit, repay and draw again | Stays in place; the line sits behind it | Ongoing or uneven needs such as renovations in phases or seasonal working capital |
| Closed-end equity loan (second position) | One lump sum, repaid in fixed installments | Stays in place; the new loan sits behind it | A single known cost such as an expansion or a partner buyout |
| Cash-out refinance | A new, larger first mortgage pays off the old one and you keep the difference | Paid off and replaced | Owners whose current loan is near maturity or who want one payment |
An equity line of credit on commercial property
A commercial equity line of credit works much like a home equity line, except the collateral is a business property and the underwriting is commercial. The lender sets a limit based on your available equity, you draw against it when you need cash, and you pay interest only on what you've drawn. Ask whether the rate is variable and what happens when the draw period ends. For lines that don't involve property, see our guide to how a business line of credit works.
A closed-end equity loan in second position
A closed-end loan gives you one lump sum, repaid in regular installments over a set term. Because your first mortgage stays in place, the new lender sits second in line, and second-position lenders price and size their loans with that in mind. It suits owners who want to keep a good rate, or avoid a prepayment penalty, on the existing mortgage.
A cash-out refinance of commercial real estate
Refinancing commercial real estate with cash out replaces your mortgage with a larger one that pays off the old balance and hands you the rest, less closing costs. The whole balance then carries the new rate and terms, and paying off the old loan early can trigger its prepayment terms. It often fits best when the existing loan is nearing a balloon date anyway.
How much equity you can borrow against
Lenders size the loan with a loan-to-value ratio (LTV), the total debt on the property divided by its appraised value, and they cap that total. For banks, the federal interagency guidelines reproduced in the OCC's Commercial Real Estate Lending handbook set a supervisory ceiling of 85% for improved commercial property and ask each bank to set its own internal limits at or below that. When a lender takes a second lien, the guidelines count the senior liens too, so the new loan plus your existing mortgage has to fit under the limit.
Here is how the math works, using example numbers only. Say the building appraises at $1,200,000, you owe $500,000 on the first mortgage, and the lender's limit for this property is 75% combined LTV.
| Example step | Amount |
|---|---|
| Appraised value | $1,200,000 |
| Existing mortgage balance | $500,000 |
| Your equity (value minus mortgage) | $700,000 |
| Maximum total debt at an example 75% LTV | $900,000 |
| Room for new borrowing (maximum debt minus mortgage) | $400,000 |
In this example the owner could seek a line or second-position loan of up to $400,000, or a cash-out refinance with a new $900,000 first mortgage that pays off the $500,000 and leaves about $400,000 before closing costs.
LTV is only the first test. The lender also checks that the business can carry the payments, using a debt service coverage ratio, which divides the cash flow available to pay debt by the yearly payments. Continuing the example, a $400,000 loan at an example rate of 8% over 20 years costs about $3,346 a month, or $40,149 a year. Add $48,000 a year on the existing mortgage and total payments come to about $88,149. If the business produces $180,000 a year available for debt service, it covers the payments about 2.04 times. If coverage falls below the lender's minimum, the loan shrinks until it fits, even when the LTV would allow more.
What lenders look at for a commercial equity loan
Underwriting looks at the building and the business together, and most lenders review the same pieces.
- The lender orders an appraisal to set the property's market value. Under a 2018 rule from the Federal Reserve, FDIC and OCC, federally regulated banks may use a less formal evaluation instead of a full appraisal on commercial real estate transactions of $500,000 or less.
- Debt service coverage shows whether the cash flow supports the new payment. For an owner-occupied building, the OCC handbook notes that the primary source of repayment is usually the cash flow of the business that occupies it, so the lender reads your business financials closely.
- Property type and occupancy shape the terms. The OCC handbook treats a property as non-owner-occupied once half or more of the repayment comes from unaffiliated tenants, and special-purpose buildings can be harder to value.
- Your credit and financials matter as much as the building. NerdWallet's guide to commercial real estate loans notes that traditional lenders factor in personal income, personal assets and credit score, and that most want to see at least two years in business.
- Environmental review protects the lender's collateral. The OCC handbook directs banks to assess environmental risk on real estate collateral, usually through a Phase I environmental site assessment.
- Title work confirms who owns the property and which liens are already recorded, so the new lender knows its position.
Expect to provide tax returns, financial statements, bank statements, a debt schedule, the current mortgage statement and any leases. Our article on small business loan requirements covers the document list in more depth.
What a commercial equity loan costs
Interest is the largest cost, quoted as a fixed or variable rate that the lender sets from the property, your financials and the structure. Second-position loans and lines generally price above a first mortgage on the same building.
Closing costs come on top of the rate. NerdWallet's guide lists origination fees, application fees, appraisal fees, legal fees and other closing costs as common charges on commercial mortgages, and you can add title insurance, recording fees and the environmental report where one is required. Ask each lender for an itemized estimate, since offers with the same rate can carry different fees.
Check the payoff terms before you sign. Prepayment penalties are common on commercial real estate loans, and NerdWallet puts the typical range at 1% to 5% of the remaining balance, often stepping down the longer you hold the loan. On a cash-out refinance, read both sets of terms, since paying off the old mortgage early can trigger a penalty under that loan as well.
How long a commercial equity loan takes
Plan in weeks. The lender has to order and receive the appraisal, run a title search, often order an environmental report, and review your business and personal financials before it can issue a commitment. A complete file at the start shortens the wait, since missing documents are a common cause of delay.
What business owners use commercial equity for
- An expansion can mean adding a location, building out unused space or renovating the property itself.
- Large equipment purchases suit a long repayment term that keeps the payment manageable.
- Working capital can carry inventory, payroll or a large contract while receivables come in.
- A partner buyout can be funded from the building's equity, and our guide to business acquisition loans covers how lenders treat buyouts and full purchases.
- Paying off shorter-term balances leaves the business with one long-term payment instead of several, and if those balances are merchant cash advances, MCA consolidation is another way to combine them.
Some owners without commercial property consider borrowing against their home instead, which puts the home at risk if the business can't keep up the payments, so get advice from your own accountant or attorney first.
SBA options for business real estate
Two SBA programs cover owner-occupied business real estate. A 7(a) loan is made by a private lender with an SBA guarantee, and a 504 loan pairs a private lender with a Certified Development Company. SBA and bank loans are among the products we place, and our SBA and bank loans page walks through each step.
An SBA 504 loan provides long-term, fixed-rate financing for major fixed assets such as buildings, land and long-life equipment. The 504 portion goes up to $5 million, or $5.5 million for some projects. It can't be used for working capital, inventory or investment in rental real estate, and under SBA rules for existing buildings the business must occupy at least 51% of the space.
A 504 loan can also refinance a building. The 504 refinancing rules allow a business that has operated for at least two years to refinance qualified debt on its fixed assets, with the 504 loan and the private lender's loan together covering up to 90% of the fair market value of the collateral. When that leaves more than the payoff, the application can include eligible business expenses such as salaries, rent, utilities and inventory, which makes it the SBA's closest equivalent to a cash-out refinance.
An SBA 7(a) loan goes up to $5 million and can be used to acquire, refinance or improve real estate, to refinance current business debt and for working capital. SBA loans take longer than most financing because of the paperwork, and some carry their own prepayment fees in the early years, so a lender can tell you whether the timing and terms fit your plan.
When you need money before an appraisal can be done
When a payroll, an order or an opportunity can't wait for an appraisal, owners often cover it with financing underwritten from the business's bank statements instead of the building.
Revenue-based financing gives you a lump sum from $5,000 to $2,000,000, typically within one to two business days. The funder buys a share of your future sales and collects it through a set daily or weekly payment sized on your usual revenue, and it usually needs no real estate or other collateral. A business line of credit of up to $250,000 gives you a revolving limit you draw on as needed, with offers often within a day and weekly or monthly repayment on what you've drawn. Owners often use one for the immediate need and put the equity loan in place for the larger project.
Both are underwritten mainly on four months of business bank statements. The funders we work with generally look for about a year in business and about $20,000 a month in deposits. If you're not there yet, apply anyway. Some funders work with newer or smaller businesses, and we'll tell you what's realistic.
How we place commercial equity loans
Today Capital Group is a funding broker. We place equity-backed loans and lines secured by commercial real estate with lenders in our network whose programs fit your property, your business and the amount you need, and the lender makes the credit decision. You fill out one application, there's nothing to pay to apply or to see offers, and there's no obligation to accept one.
To get started, gather your most recent mortgage statement, a rough idea of the property's value, the last two years of business tax returns and four months of business bank statements. Then apply, call us at (818) 351-0225, or send us a message about the property you want to borrow against.
Frequently asked questions
What is a commercial equity line of credit?
A commercial equity line of credit is a revolving line secured by the equity in a commercial property. The lender sets a limit based on the appraised value minus the debt already on the building, you draw what you need, and you pay interest only on the amount you've drawn.
Can you get a HELOC on a commercial property?
Lenders rarely call it a HELOC, since that's a residential product, but commercial versions exist. A commercial equity line of credit, a second-position loan or a cash-out refinance lets you borrow against a commercial building, with the lender deciding from the appraisal, the total loan-to-value, your cash flow and your credit.
How much equity can I take out of my commercial property?
It depends on the lender's loan-to-value limit and your cash flow. The lender multiplies the appraised value by its limit and subtracts what you already owe, so with an example $1,200,000 value, a 75% limit and a $500,000 mortgage, the room for new borrowing is $400,000. The federal supervisory ceiling for banks on improved commercial property is 85%, and each lender sets its own limit at or below that.
Can you do a cash-out refinance on commercial property?
Yes. A new, larger first mortgage pays off the existing one and you receive the difference, minus closing costs. It replaces your current rate and terms on the whole balance, so compare it with a second-position loan or line if your existing mortgage has a good rate or a prepayment penalty.
What is equity-based lending?
Equity-based lending means a loan sized mainly on the value of an asset you own and the equity you hold in it. For business owners it most often means borrowing against commercial real estate, and it's part of the wider category of asset-based loans, which can also be secured by receivables, inventory or equipment.
