Loans can be a bit intimidating. While receiving a bunch of money upfront is quite exciting and different, there will eventually become a time when you’re going to have to pay all of that money back.
If you’re a business owner, you’ve no doubt heard and read about the millions of tips there are to help and grow your business, but have you heard about physically growing your business?
You can always hire more people and add a few people to your team, but what about adding to your office space? If that sounds more like your plans, read below to find out some important information about your next business steps.
What is a commercial real estate loan for?
First things first, let’s cover what this type of loan is actually for. As hinted at above, your commercial real estate loan is going to be about adding space to your current business location. This could be an addition like a new warehouse, office space or break room off to the side. You may also be looking at renovating your business place.
You can’t use the loan for buying new office chairs, adding new computers or upgrading the payment software you have. It has to be for your building. In order to apply for one, however, you first need to own at least 51% of your workplace building.
What’s the structure like?
Commercial real estate loans, while dealing with property, are a bit different than personal mortgage loans you may be all too familiar with. While with some mortgages, you are not required to put anything down, commercial real estate loans often require you to put 30% down. That’s higher than the standard practice of 20% down that comes with most houses.
In addition, the length is shorter as well. Instead of 30 years, the maximum most lenders will accept is 20 and even then, some are shorter than that.
Commercial real estate loans are not directly tied to the property but are granted “liens” on the commercial property. Liens, not linens misspelt, is the right that the property owner gives to a creditor as a guarantee for the repayment of the commercial real estate loan. It gives the commercial real estate lender protection in case you are unable to pay back the loan in full.
Applying for the Loan
When you’re looking for a commercial real estate loan, it’s quite common to head to the bank. More and more local and regional banks are where people go for loans, a trend that is likely to continue over the next coming years.
Banks are great and easy places to get loans. They have someone there to answer your questions and doubts and most people are familiar with the whole banking process. The negative is that banks usually ask you to meet more requirements and can be slower in approving loans that other institutions.
So it’s good to know that banks aren’t your only option. Many other people choose to go to commercial lenders. They don’t have as many boxes to check and their closing costs are much cheaper than banks. The negative side is that they charge higher interest rates and may not be as flexible on the type or length of loans that banks would give.
Commercial lenders may also ask you to accept a balloon payment loan, which typically last between five and seven years. Throughout the first few years, you’ll be paying off your loan as if it were a 30-year loan and then make large payments through the end of the loan’s term. It’s a riskier move but could work in certain situations.
There are other options as well such as conduit and hard-money lenders. These also have their own certain requirements and can vary widely from lender to lender.
Most all lenders will want you to have a history of your business finances, personal finances (if you’re a small or relatively new business), tax returns, business plan, cash flow projections and more. Once again, the exact list of requirements may vary widely from lender to lender so be sure and speak with an accountant before going just to make sure you have everything you need.