As your business grows and expands, you may find that your current location just isn’t cutting it anymore. Whether you need to renovate your current space or purchase a larger location, a commercial real estate loan can help.
There’s a lot more to a loan than simply filling out an application, getting funding, and paying back what you borrow. Here are the basics of lending to help you get the best rates and terms possible.
How the Loan Works
A commercial real estate loan is a type of business loan used to purchase a new or used commercial property. The loan enables a business owner to finance the purchase or perform any necessary construction or renovations.
The loan itself acts almost like a mortgage for commercial property and is secured by the property itself. There are three basic components: interest rates, terms, and fees.
Interest rates. The interest rate is a percentage of the principal that’s charged for borrowing funds. Rates are dependent upon many factors, including:
- The type of business you have
- The financial health of your business
- Your creditworthiness
- The type of lender you work with
- Loan to value ratio
Terms. The term of your loan refers to the length of time you have to pay back the total amount that you borrow. Loans for commercial properties are typically available with intermediate terms (3 years or less) or long-term (5 to 20 years).
Fees. Many loans for commercial properties come with additional fees. These fees might include:
- Application
- Origination
- Late or non-payment
- Prepayment
Not all lenders have the same fees, so compare your options carefully.
Applying for Financing
To apply for financing, you need to provide the lender with financial information and proof that you can repay the amount you borrow. You need to provide a detailed business plan, which should include how you intend to use the property. Lenders require 3 to 5 years of financial documents as well as your personal financial information. You may also need to provide a 25%-30% down payment.
Where Can I Get a Loan?
There are several places where you can get a loan for commercial real estate. One of the best places to start for small businesses is the Small Business Administration. Other places include:
- Commercial banks
- Credit unions
- Life insurers
- Commercial mortgage-backed security lenders
Just like applying for any other type of business loan, you should investigate several lenders. Not all lenders offer the same rates, terms, or options. Finding the best loan for your business will ensure that you get the most out of your funding.
