Whether you are experiencing a seasonal slump, or planning a potential business expansion, commercial loans can supply you with the funds your business needs to thrive and grow. Commercial loans are funds issued between a bank and a business to pay for day-to-day operations, cover one-time expenditures or to finance commercial real estate development projects. Moreover, businesses can apply for commercial mortgages towards the purchase of commercial land or real estate.
There are numerous loans available specifically designed for commercial development and real estate purposes including lot loans, SBA loans, lines of credit and property loans.
COMMERCIAL LOT LOAN:
FINANCE COMMERCIAL REAL ESTATE ACQUISITIONS
A commercial lot loan, most commonly referred to as a commercial real estate loan or commercial mortgage loan, provides enterprises with funds to purchase land or property for their business. The primary difference between residential real estate and commercial real estate is that a commercial property is not used for residential purposes and instead to generate income. The exception to this rule is owner-occupied real estate, where the owner uses the property as their primary home and rents other units out to tenants.
When it comes to defining commercial real estate, there are several classes of
property-generating real estate including:
● Land (Agriculture, Commercial or Residential Development)
● Investment Property (Airbnb, Short-term Rental)
It is important to note that some commercial loans are exclusive to certain classes of real estate, so be sure to research the individual requirements of your desired loan.
TERMS & RATES OF A COMMERCIAL PROPERTY LOAN:
The same way that residential mortgage can be used towards the purchase of a home, a commercial mortgage can be used towards the purchase of a business property. However, there are some distinct qualities of a commercial mortgage that are important to note.
COMMERCIAL MORTGAGE VS. RESIDENTIAL MORTGAGE:
SHORTER TERM LOAN:
Unlike a residential mortgage that can be issued for up to 30 years, commercial property loans are usually only issued for periods of 5 to 10 years with an amortization period of up to 25 years. At the end of a commercial mortgage, you will likely have to pay the outstanding balance in a balloon payment.
HIGHER DOWN PAYMENTS:
Generally, lenders will require you to have at least 25% in equity in the property to be eligible for the mortgage. Some commercial mortgage lenders will even require a down payment of up to 40%, which is significantly more than the down payment required for a residential mortgage.
VARIABLE INTEREST RATES
Not only do commercial property loan rates tend to be higher than residential mortgage rates, they rarely offer fixed interest rates. While occasionally commercial mortgages can be issued with a fixed interest rate, most carry variable interest rates, where the interest rate can change.
Commercial mortgages are secured commercial loans that require a form of asset-based collateral. Usually, the purchased property acts as collateral towards the loan. Just like with a residential mortgage, if you fail to repay the loan, the property can be seized by the lender.
HARDER TO QUALIFY FOR:
In general, commercial property loans are harder to qualify for than residential mortgages and carry higher origination rates. Though providing collateral can generally lower interest rates, your individual rates will depend on your credit score, business health, and financial circumstances.
COMMERCIAL MORTGAGE VS. RESIDENTIAL MORTGAGE:
The terms and conditions of a commercial property mortgage will vary based on the type of loan. There are a range of commercial investment property loans including hard money loans, bridge loans and SBA loans that are all designed for acquiring commercial real estate
Hard Money Loan:
Secured, short term loan, that uses the commercial property as collateral and needs to be repaid within 12-24 months. Hard money loans are not usually issued by banks and are instead issued by private lenders. Often, hard money loans are easier to qualify for than other types of residential property loans. If you are rejected from a traditional lender, consider applying for a hard money loan. Hard money loans can be issued rather quickly.
Commercial Bridge Loan:
Short term, secured loan that uses the commercial property for collateral. A bridge loan can be an ideal interim solution for cash flow if needed while you apply for a long term commercial real estate loan. A commercial bridge loan can be used to pay for renovations or even towards a real estate purchase, but needs to be paid back within 12-36 months.
Commercial Land Loan / Commercial Land Financing
A commercial land loan can help you purchase a plot of land that can be later developed for agriculture, residential or commercial subdivisions. But, land loans, or lot loans as they are sometimes called, do not cover construction costs. Generally, land loans have higher interest rates, however, rates can be lower if you apply for a subsidized land loan through the USDA or the SBA.
Real Estate Loan:
One of the most affordable avenues for commercial real estate loans is through the U.S. Small Business Administration. The SBA offers two kinds of loans, 504 and 7(a), that can be used towards the purchase or development of commercial real estate. These loans often have lower interest rates and more flexibility but can be difficult to qualify for. Furthermore, sometimes the SBA requires you to have owner-occupied status to qualify. An SBA Loan for commercial property can also be used to purchase equipment, repair and improve existing facilities or towards the expansion of a pre-existing building.
DEVELOPING PROFITABLE COMMERCIAL
REAL ESTATE PROJECTS
Once you have acquired the plot of land or property, you may need funds for construction, development and for running the actual enterprise. There are a range of commercial loans available that can provide funds for business growth and operations.
Commercial Construction Loan:
A construction loan for commercial property can grant you up to 90% of the total cost of construction. Construction loans require large down payments so that you can make interest-only payments during the period of construction. Lenders will often request a property appraisal to calculate the value of the intended project.
Commercial Line of Credit:
A commercial line of credit is an excellent way to get access to funds as you need them. A line of credit is a revolving short-term borrowing limit that can be used towards a variety of business-related purposes, including working capital, payroll, inventory, equipment and even construction and development. A line of credit is an unsecured commercial loan which means you don’t need to provide any collateral.
Commercial Loans for Small Businesses:
The SBA offers a number of commercial term loans (504, 7a, microloans) that can provide small businesses with working capital, cash flow, equipment, rent, payroll and other expenses. Aside from the SBA, there are a range of lenders that issue online commercial loans including credit card companies, credit unions and digital lending organizations.
APPLYING FOR A COMMERCIAL LOAN:
It can take several weeks for a lender to process your application. However, once the loan is approved, the funding can be issued within a few days.
Preparing for the application can take a few months, so it is important to start as soon as possible. It may be in your interest to work with a loan consulting service to help you navigate the loan application process.
While every lender is different, in general, to qualify for a commercial loan, you will need the following:
COMMERCIAL LOAN REQUIREMENTS:
Time in Business
(20-25% for construction or real estate purchase)
(Commercial lenders do not look at personal income, instead they consider your businesses income via tax returns)
(Asset-based collateral is necessary for a secured commercial loan)
For certain land and construction loans, lenders may also require a property appraisal and that you have all of the right permits before you can be issued the loan.
Are you looking to purchase commercial real estate?
Loan Consulting Pro is a loan consulting and digital lending service that can help you navigate all aspects of the commercial loan application process. We work with experts in all industries to connect you with the right lender for your financial situation and business goals. Contact us today to use our loan consulting services.
connect with us
We would love to respond to your querues and help you succeed.
Feel free to get in touch with us.