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With over 30.7 million small businesses in the US, SMEs form th backbone of the American economy. Anyone who starts a small business starts it with dreams that it’ll grow into a huge enterprise one day. This is easier said than done, but it’s especially hard for brick-and-mortar businesses.
Finding and affording commercial property is one factor that precludes business growth. However, thanks to commercial property loans, businesses can now afford real estate for their business activities. This financing allows businesses to buy spaces in malls, shopping centers, and even warehouses.
Commercial property financing is a murky subject for most folks, but that’s where we come in. Keep reading and learn about everything you need to know about commercial real estate financing, including how it works.
What Is Commercial Property Financing?
As the name connotes, commercial property financing defines arrangements between companies and financial institutions to finance commercial real estate acquisition. There are many types of commercial property financing, and it’s up to the business to decide what works for them.
In some spheres, commercial property financing is known as a commercial real estate loan. This type of financing is ideal for LLCs and S-corporations. The loan finances the purchase or development of construction space.
Commercial real estate loans are secured loans with the property in question serving as the collateral. The lender has the right to foreclose the property should you fail to repay the loan.
How Does Commercial Property Financing Work?
Commercial properties come with sky-high prices, and most businesses, especially small businesses, can’t afford them. Commercial real estate loans give such businesses the leeway to move into or develop commercial property. These loans are essentially mortgages secured by liens.
In most cases, lenders require a 20 to 30 percent downpayment of the commercial property in question. Businesses must also be ready for a lien on the property or any other asset of equal worth. A line is a legal mandate to possess another party’s property should they fail to repay a debt.
Terms of Repayment and Loan period
With residential mortgages, the borrower repays the loan in regular monthly payments throughout the loan’s lifespan until fully repaid. Commercial real estate loans work a bit differently. Unlike residential mortgages, commercial property loans break down into three types, depending on their payment terms.
The first type is known as an intermediate-term loan with a repayment period of no more than three years. The second type is a long-term loan that lasts between five to 20 years. The third is your typical amortized loan, meaning you pay regular monthly installments until you pay back the entire loan plus interest.
The fourth type of commercial real estate loan is a balloon loan. This is the least known of the four, possibly because not many lenders offer this loan type. With a balloon loan, you’ll make regular monthly payments, but unlike other loans, you pay the principal amount at the end of the loan to complete payments.
Balloon commercial property loans may not be the best commercial property loan for most businesses. That’s because the final payment could end up being very high for most businesses to afford.
Commercial Real Estate Financing Options
As mentioned earlier, there are various types of commercial property financing options for businesses to consider. Commercial loans roughly break down into five categories that we’ll explore at length. Here are the major types of real estate loans.
Bridge Loans
Bride loans are short-term commercial real estate loans with a repayment term of half a year to two years. Bridge loans fulfill pressing financial obligations; in this case, buying commercial property. These loans are ideal for situations when the buyer needs to sell the property within a given time.
You can also use a bridge loan to pay off pending debts to preserve your positive credit rate. Most people are averse to bridge loans because they attract high-interest rates. However, instant access to equity is enough reason for businesses to consider bridge loans.
Standard Commercial Property Loans
These are the most common types of commercial real estate loans. You can think of them as the commercial version of residential mortgages. They are secured commercial mortgages secured with the property.
We already highlighted the different types of commercial property loans according to repayment terms. Lenders can also secure the loan with other assets like inventory, machinery, and CDs as collateral.
SBA Loans
SBA loans are loans from the Small Business Administration for, you guessed it, small businesses. These small business loans help startups and small enterprises finance their daily activities and buy commercial property.
With SBA loans, the SBA can guarantee a significant portion of the loan, decreasing the risk of defaulting. This attracts a lower interest and is the go-to option for most small businesses.
Seller-Financed Loans
In certain cases, the seller may be able to finance a businesses’ property acquisition. Seller-financed loans tend to be more flexible and lenient than bank loans.
However, not many sellers are willing to finance just any business. Sellers are more ready to finance a business with a steady income flow like apartment complexes.
Hard Money Loans
Companies with substandard credit ratings can settle for hard money loans to buy commercial property. Hard money loans are secured against the actual value of the property. These loans are mostly offered by private lending companies.
If you’re having tough luck with banks and other financial institutions, you can settle for private lenders. They’ll most likely offer you a hard money loan.
With so many types of commercial real estate loans, it can be hard to figure out which one is right for you. You can visit https://www.austinofficespace.com/ for advice on how to pick the best commercial real estate loan and commercial property.
Commercial Real Estate Loans To Grow Your Business
Owning commercial property is a walk in the park with commercial property financing. Just ensure you find the right lender and the right financing option. Use commercial real estate loans to take your business to greater heights.
We’ve only scratched the surface. For more informative reads, check out the other posts on the site.
