Are you a budding entrepreneur seeking a business? Perhaps, you already have an existing operational facility that needs an upgrade or are even looking into physical expansion to new territories. You, therefore, must already be considering property financing.
Commercial real estate, as the name suggests is any building or premise dedicated to business undertakings. It could be offices, mall complexes, stores, hotels, industries, etc. To own such property is a costly affair. Entrepreneurs might need many years, if not decades, of savings to realize this goal.
Luckily, there exist credit options that make acquisition of such business property faster with the huge financial burden split into numerous manageable partial payments over an extended period of time.
Commercial real estate loan
This type of funding specifically targets businesses that need substantial backing to purchase or develop new offices/factories or remodel existing ones. It is only available to limited business models.
Similar to mortgages, commercial real estate loans are secured by a lien, in this case, to the business property. What does this mean? In the event that the business is unable to pay off the loan, the funding company has a legal right to possess the facility. In other words, the property is used as security.
Before plunging in too deep, as a small business, it is critical that you evaluate what is available and suitable for your business. Most ill-informed ventures end up getting locked in contracts with ridiculous rates and unfavorable terms, leading to capital losses and inability to pay up. What more, then, is there to expect?
- Down payment
An upfront payment of a percentage of the property’s price is a necessity with any lender. This deposit could be anything from 10-30 percent.
- Interest rates
You can expect interest rates of between 3.5-6 percent. Check out a couple of insurance companies, mortgage companies, banks, and credit unions to compare and get the best rate.
Note that the bigger a down payment, the lower the loan to value ratio. The lower the loan to value ratio, the lower the interest rates and vice versa. This understanding can significantly reduce or raise your final cost. You may be wondering exactly what is ltv? This is why it is important to educate yourself on common terms before financing your small business.
Additional costs associated with commercial real estate loans include application and processing fees, charges for surveys, and legal fees. Paying of loans early eliminates the yield the funding entity expects. Consequently, certain charges may apply for early payment. Other lenders choose to lock out early payments before a defined period has elapsed while others demand an interest guarantee. Ensure that the terms are very clear prior to signing anything.
- Repayment plan
Repayment of property financing depends on whether it is an amortized or balloon loan. A fixed installment payment over a period of time covering both principal and interest is to be expected with an amortized loan. Balloon loans, on the other hand, are paid off in fixed installments and one large final payment for the remaining principal. The latter should be avoided by small businesses as the last payment might be too large to settle at the time it’s due.
Major ways to finance commercial real estate
There are four major ways of financing business property, each with varying terms and minimum requirements. Here’s a summary.
CDC/SBA 504 loan
The US small business administration backs businessmen through this property financing product. It offers the best funding for small businesses. The CBC/SBA 504 loan has a fixed rate throughout 10-20 years, as opposed to prime lending rate, making it easy to work out the actual payment. Compared to other financing options, this program has floor interest rates at 5%, making it one of the most affordable options available to small businesses. Down payment is as low as 10% of the buying price, and there’s no maximum limit. An SBA 7(a) all-purpose loan may also be taken up for this purpose.
Traditional commercial mortgage loan
This is a typical loan offered by banks or other lending financial institutions geared towards acquisitions. While it offers high amounts of funding with some of the lowest interest rates in the market, the eligibility criteria are pretty tough. It is designed for prime businesses with a high credit score of 700 and above and with great profit margins, too, locking out many small businesses below the threshold.
Commercial real estate hard-money loan
Established investors and private lenders also give commercial real estate loans, otherwise known as hard-money loans. In comparison to banks and SBA, these feature minimal amounts of money and higher interest. What makes hard-money loans lucrative, however, is the fact that the qualifications are less stringent on borrowers, making it ideal for those with a poor credit score likely to be shunned by banks and lending institutions. In addition, the loan can be processed in a matter of two weeks, or even less. This makes it ideal for competitive businesses that need to grab opportunities fast. Since the amounts are much smaller, it is a great option for financing upgrades.
Commercial bridge loan
A commercial bridge loan is a quick, short-term loan taken out to purchase business property with the intent of refinancing with a long-term loan or permanent mortgage at a future date. It is designed to help property buyers compete with cash buyers on even ground and seal property deals just as swiftly, thanks to its 15-45 days approval timeframe.
Commercial real estate loans might just be what your small business needs in order to rise to greater heights. There are numerous metrics used to qualify and disqualify small businesses. Being informed and having things in check increase your chances of getting financing. Maintaining a clean credit history, having high-value collateral, well-projected cashflow, clearly demonstrating ability to fully pay off a loan, strategic business plan, outstanding management expertise, and financial statements that have clout are some of the most important determining factors. When you finally get the approval, however, be sure that all the terms are clear before signing.