Financing is a big part of getting the right commercial location secured to start a small business. Here’s a few important boxes to check on where to find commercial real estate loans and how to get approved for one.
Like the name implies, commercial real estate loans are a mortgage loan that applies to a commercial as opposed to a residential property. Commercial properties are those that produce business income. Commercial loans can be used to purchase office locations, retail stores and a variety of other places and buildings.
What Are Commercial Real Estate Loans?
There are some differences between commercial real estate loans and their residential counterparts. The terms are shorter on commercial loans that they generally range from five years or less to 20 years.
They also require a final “balloon” payment at the end to pay off the loan in full. For example, a $2 million commercial loan might have monthly payments of close to $12,000 a month with a balloon payment of $1million at the end to pay outstanding balance of the loan right off.
Keep in mind the interest rates are generally higher too.
Kinds of Commercial Real Estate Loans and Programs Available
There are several places to choose from when you’re looking to get one of these commercial real estate loans. Here’s a few of the financing sources you can look at:
Bank Loans
These generally have a lower interest rate than other types. However, they’re hard to come by since the Great Recession and you’ll need to have a good chunk of collateral for these institutions to look at your numbers.
Construction Loans
These are short-term financial vehicles that are geared towards building commercial property on the real estate. Keep in mind the banks release the money periodically as construction progresses.
Bridge Loans
Like the name implies, this is a bridge to all longer-term commercial real estate mortgage solutions. Watch out for high rates here and the expectation that you’ll fold the bridge loan over into a longer commitment when it matures.
Crowdfunding
This is one of the latest additions to the financial possibilities for these types of loans. Crowdfunding is done through online portals where potential investors evaluate the risks.
SBA 7(a) Loan Program
The Small Business Administration (SBA) hands out $20 billion in these loans annually to small businesses. These are used to buy, fixup and or build on commercial real estate. They’re not an actual loan but a guarantee to banks.
SBA 504 Loan Program
It’s no surprise the SBA gets a few mentions on this list. Again these aren’t really loans but guarantees to back loans from other institutions are geared towards fixed assets and small businesses can put as little as 10% down to get involved.
USDA Business and Industry Loan Program
This is another program that provides guarantees for commercial real estate mortgage loans. You can use this link to go to a tool on the website to find out if the property you are thinking about is eligible for one of these loans.
What to Do To Get Ready
Having your ducks in a row before you apply for one of these loans is a good idea. One of the linchpins for successful commercial real estate loans is the letter of intent. You’ll need to have a lawyer look this over because it constitutes an offer and the lending institution will want to see it.
If it’s possible, experts suggest that you give yourself 30 days before finalizing any deal. This will give you enough time to look over all the documents carefully like maintenance and lease contracts.
It’s always a good idea to go over your budget to make sure your finances are in order. That’s why before you approach any kind of lending institution you should go over these numbers with your accountant.
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