Loan Process
Commercial FINANCING Loans info.
If you’re a small business owner, the chances are high that you’re leasing the commercial space that houses your retail business or the warehouse where you keep your goods. However, some people (and companies) choose to buy commercial space instead of leasing. And unless they have enough money to pay cash for the property, they will probably seek out a commercial real estate loan.
Home mortgages generally require a down payment of at least 20% if the buyer wants to avoid paying private mortgage insurance. But some loans, particularly VA and FHA allow for single-digit down payments or even a 0% down payment. Commercial mortgages, on the other hand, can come with down payment requirements as high as 35%.
Real Estate Loans.
A real estate developer, trust, or corporation can apply for a commercial mortgage to secure financing for a commercial property. Often, the entity that takes out the commercial mortgage will then rent the commercial property to tenants and generate a profit.
There is an assortment of ways for business people to borrow money for commercial property. Here are five of the most common ways:
Permanent Loans
A permanent loan is the first mortgage on a newly built commercial property. The funds disbursed via these loans are typically used to help pay back a construction loan. They have been known to aid with refinancing as well, though.
Although the title of “permanent” would have you believe these mortgages last forever, they usually hold amortization forms of 20 or 25 years. Banks tend to be the premier lenders for these loans, but credit unions and life insurance companies offer them too.
Small Business Administration (SBA) Loans
The Small Business Administration, or SBA, guarantees, at least partially, loans from SBA-approved lenders. The SBA will usually back anywhere up to 85% of the loan’s value. SBA loans provide many benefits to business owners, like low down payments, solid interest rates, and reasonable qualification requirements.
Not all SBA loans will call for a down payment. However, the norm is 10% to 20%, so you may need to muster up some cash. In some cases, you can also take advantage of small business grants.
Perhaps the most common SBA mortgage is the 7(a) Loan. This can fund any stage of the commercial real estate process, from land purchase to construction to renovation. 7(a) loans can range as high as $5 million in size. Interest rates are usually either fixed or variable, though you may receive some combination of the two.
Bridge Loans
A bridge loan is a short-term loan that’s used to cover a company’s immediate cash flow needs while the property owner either secures long-term financing, meets an existing financial obligation, or sells the property. For these reasons, one- or two-year terms almost always accompany bridge loans.
If you take out a bridge loan, chances are you’ll receive a high interest rate. On top of this, you may also need to put up some collateral, such as the real estate itself. Furthermore, bridge loans are usually only granted to those with strong credit and a low debt to income ratio
Hard Money Loans
It can be tough for some business owners to secure a real estate mortgage. Hard money loans allow these individuals to take out a loan backed simply by the value of the property. While this offers less stringent credit requirements, hard money lenders often lend only around 70% of the collateralized property’s value.
Hard money loans are inherently risky, as you’re putting your commercial property up as collateral. That means that if you default, the lender could decide to seize your property. This risk might be too much to bear, especially for companies where money is still tight.
Commercial Construction Loans
If building or renovating your commercial property is on the docket, but you don’t qualify for an SBA loan, a commercial construction loan might be your solution. The funds you get from these loans aren’t reserved solely for building materials. You can pay for a labor force with them as well.
However, commercial construction loans operate differently than traditional commercial mortgages. Rather than receive the full amount of your loan upfront, you’ll have to draw funds from the loan as you need them. This is commonly referred to as a “draw schedule.” As you progress through the various milestones in the construction process, the lender will send out an inspector to ensure things are complete. If so, only then will you receive the next payment.
TESTIMONIALS
What Client Says
Residential vs. commercial real estate loans
Residential real estate loan
Commercial real estate loan
Qualify with personal credit
Qualify with business and personal credit
15- or 30-year loans, typically
5- to 25-year loans
Generally fully amortizing
It May or may not be fully amortizing; if not, may require a balloon payment at the end of the term
Flexible options for down payment
Requires 20% down payment or more
