A commercial mortgage is a loan made using real estate as collateral to secure repayment.

A commercial mortgage is similar to a residential mortgage, except the collateral is a commercial building or other business real estate, not residential property.

In addition, commercial mortgages are typically taken on by businesses instead of individual borrowers. The borrower may be a partnership, incorporated business, or limited company, so assessment of the creditworthiness of the business can be more complicated than is the case with residential mortgages.

Commercial mortgages are typically nonrecourse, that is, that in the event of default in repayment, the creditor can only seize the collateral, but has no further claim against the borrower for any remaining deficiency. The general reason for this is twofold: many laws significantly prevent the creditor from going after the borrower for any deficiency, and mortgages structured for sale as bonds give a higher priority to constantly receiving some sort of income and therefore require a clause which allows the lender to take the property immediately regardless of bankruptcy proceedings that the borrower might be going through. Less commonly, the mortgage is supplemented by a general obligation of the borrower, which makes the debt payable in full even if foreclosure on the mortgaged collateral does not satisfy the outstanding balance.

While strong credit and a solid business plan are important to getting a commercial real estate mortgage, the most significant factor the lender looks for is your available cash flow. Lenders look at two key ratios to determine if you can consistently make timely payments - loan to value and debt service coverage.

The loan-to-value ratio (LTV) is the amount you wish to borrow divided by the appraised property value. For example, if you put 25% down and borrow the rest of the purchase price, your LTV is 0.75. The lower the ratio, the better candidate you are for lower interest rates.

Debt service coverage ratio (DSCR) is essentially a "financial cushion" that ensures your property will provide more income than you need to make monthly mortgage payments. Lenders determine your DSCR by dividing your net income by your monthly interest and mortgage payments. Your DSCR needs to be at least 1.25 or higher to be considered at low risk for a loan.

Keep in mind that neither ratio accounts for day-to-day facility operating expenses. You still need enough cash to cover such costs as employee payroll, utilities, supplies, and marketing.

Typical commercial real estate mortgages start at $400,000 to $500,000 or more. To secure a mortgage of this size, your business will need to make a sizeable down payment. Commercial lenders generally require 20% to 30% down payments. Some lenders might accept 10% down if your other finances look strong, but you'll pay a higher interest rate in exchange. And unlike residential mortgages, you can’t finance commercial property with "zero money down."

With a mortgage, cash troubles are especially dangerous because the building itself is the collateral for your loan. If you miss payments, or your DSCR falls below 1.25, the bank can foreclose on the building to recoup their losses. If buying a property means overextending your finances, you may want to continue leasing until your business is in a better cash position.