Commercial property is an investment that can produce income and capital gains. It is also a necessary investment for some businesses.
Commercial property loans can be used to buy, construct or rehabilitate commercial and industrial properties. These can include office buildings, retail stores, warehouses and hotels. They may require owner-occupied space (at least 51% of the property). Often lenders look at your business finances to ensure you can make loan repayments every month.
Term Loans
A term loan is a one-time financing option with an amortization period and a set repayment schedule. These types of loans can be provided by banks, credit unions, community development financial institutions and online lenders. Generally, they require comprehensive information from borrowers, including their business plan and a cash flow projection. They can be used to fund anything from acquiring equipment and vehicles to expanding into a new space or improving an existing location. However, they’re best suited for businesses that have been operating for some time and can demonstrate solid business stability and cash flow.
Commercial real estate (CRE) loans are typically a type of mortgage that’s used to purchase, build or refinance non-owner-occupied buildings. These properties may include offices, warehouses, apartment complexes and other commercial buildings. These loans are usually backed by some type of collateral, such as property, plant or equipment that the bank can take control of in the event of default or bankruptcy. Alternatively, they can be backed by a portion of future accounts receivable or cash flows.
Compared to residential loans, commercial loans can have higher loan amounts and longer repayment terms. In general, they’re also more difficult to qualify for. This is because qualifying for a residential mortgage largely depends on you and your personal income, while commercial loans rely more on the property’s earnings potential.
The underwriting process for these loans can be more involved than with other types of business financing, and a credit score that’s above 660 is often required to be considered. This is because lenders view these loans as more risky than other types of financing, and they need to be confident that the borrower will be able to afford the monthly loan payments.
Many commercial term loans have fixed interest rates, meaning your rate will remain the same for the duration of the loan, regardless of market interest rates. By contrast, business lines of credit typically feature variable interest rates, which means your rate can fluctuate along with standard market rates. This can be good or bad depending on whether or when market interest rates rise, as it’s possible your monthly repayment amount could increase.
Lines of Credit
A business line of credit can be used to finance inventory, accounts receivable, and other working capital needs, such as Florida real estate loans. Like term loans, lines of credit require a thorough business plan and financial projections. They can be secured by collateral (such as inventory or accounts receivable) or unsecured, with the lender requiring personal guarantees. The stronger your business credentials, the more favorable terms you’ll receive.
Lenders typically want to see a minimum of one year of business history and credit scores. They will also examine the amount of annual revenue your business generates. Lines of credit can be a better fit for businesses that experience fluctuating cash flows, as they are easier to manage than loan payments. However, you should be aware that some lenders may charge fees for maintaining a line of credit, such as monthly or annual maintenance fees, transaction or draw fees, and an inactivity fee. Interest will begin to accumulate as soon as funds are drawn on the line of credit, and you may be subject to other fees if your account balance exceeds its limit.
Commercial property loans are typically used to fund the purchase of properties like office buildings, industrial areas, hotels, retail spaces, and warehouses. They can be provided by traditional banks, online lenders, or by commercial real estate brokers. Compared to residential mortgages, commercial loans tend to have a higher loan-to-value cost and require a larger down payment. Additionally, they may not be as readily available because lenders are more risk-averse when it comes to lending to commercial borrowers.
Moreover, there are fewer programs for securitizing commercial loans. As a result, many lenders are more strict with their credit requirements and down payment amounts for commercial property loans. Some require a minimum credit score of 660 and require on premise occupancy for the property.
Regardless of which type of loan you choose, it is essential to carefully assess your business’s credit and financial status before applying for a commercial property loan. In addition, you should carefully evaluate the underlying asset to ensure it’s worth the investment.
SBA Loans
There are many reasons you may need a commercial loan. You can use a loan to acquire or build new commercial property, purchase an existing business, buy inventory and equipment or finance expansion. The type of commercial loan you need will depend on the purpose and your plan for how you’ll repay it. Whether you need a term loan, line of credit or SBA loan, the best lender for your needs will be one that offers terms and conditions suitable for your company’s current and expected financial health.
Lenders want to make sure that the income from your business compared with expenses will be enough to cover your monthly loan payments. This is called a debt-service coverage ratio and can be calculated using your bank statements, business tax returns, personal tax returns and other documentation. Most lenders will want to see a 1.25 or higher DSCR.
SBA loans are guaranteed by the federal government, which lowers the risk for lenders and increases your chances of getting approved for a large loan amount with competitive interest rates and flexible repayment terms. However, it’s still a good idea to prepare thoroughly for your application, including checking your business credit score and personal finances before applying.
In the case of a business line of credit, you can receive a credit limit for your business in a certain amount, say $10M, and draw on it as needed through individual “advances.” Each advance has established approval criteria like a maximum loan-to-value (LTV), debt service coverage ratio and loan to cost.
Conventional small business loans are typically given by lenders who take on the full risk of your loan repayment. You will be required to provide a personal guarantee and your credit scores will play a role in the process. You will also have to show a clear plan for how you’ll use the funds and prove that your business has sufficient cash flow to meet the payment terms.
Hard Money Loans
Hard money loans are a short-term solution that is typically used to finance rehab and flipping properties. They can be an excellent tool for real estate investors since the approval process tends to be much faster than conventional mortgage loans. Hard money lenders are private investors who can make lending decisions based on the property itself rather than the borrower’s financial situation, which can be a great benefit for buyers who need to close a deal quickly or who have a poor credit score.
Because hard money loans are usually more expensive than mortgages, it is important to consider all the associated costs and terms when choosing a lender. For example, you will need to factor in the loan term (typically 12 months), interest rate, fees and points. Also, consider whether the repayment terms are interest-only or if principal will be paid monthly.
Another consideration is the maximum loan-to-value ratio, which is the percentage of the property’s value that can be borrowed. This is often capped at 65% to 75%, which means that you will need to put up some equity upfront. Additionally, hard money lenders often have strict deadlines that you need to meet if you plan on renovating the property and selling it within a certain time frame.
In addition, hard money lenders typically charge higher interest rates than traditional lenders because they take more risks when lending the money. However, borrowers can reduce the cost of hard money loans by looking for lenders that offer lower interest rates and loan terms, which will help them save money in the long run.
It’s also important to have an exit strategy in place for when the hard money loan comes due, such as having a buyer lined up for the property or refinancing it into a conventional mortgage. This will help you avoid stumbling into costly pitfalls down the road.
