Commercial properties are purchased and/or improved using loans. Loans will impact cash flow, monthly payments and the overall long-term cost of the property.
You’ll have an easier time choosing a loan if you understand the different types of commercial real estate loans available.
Start With the Property’s Purpose
Commercial Real Estate Loans (CREL) are created with specific purposes. They may assist with buying property, paying for repairs, building something from scratch, or expanding the size of the company’s operations.
Commercial Mortgage Loans
The purpose of a commercial mortgage is to finance the purchase of or to pay off the existing debt on a commercial real estate property (e.g., office building, shopping center, warehouse, apartment building). The property being financed can also serve as collateral for the loan. Lenders offer different loan terms, interest rates, and required down payments.
SBA Loans
SBA has several loan programs designed specifically to help business owners acquire and/or make improvements on their owner-occupied commercial real estate.
The SBA 7(a) Loan Program is an option for funding different parts of your business, including purchasing and/or leasing property.
SBA 504 loans provide assistance for the financing of fixed assets (land, buildings, equipment) that will be used for business purposes through a structured financial transaction.
These loans may suit businesses that plan to operate from the property.
Bridge Loans
Bridge loans are used for short-term financing when you need to purchase something immediately, plan on refinancing your loan at a later date, or need to finance renovations during the time that you are transitioning from one property to another. However, because bridge loans typically carry higher interest rates and other associated costs than traditional forms of financing, it is important for you to develop an exit strategy before applying for a bridge loan.
Construction Loans
Construction loans are used to pay for the construction of a new commercial building or to make significant improvements to an existing one. Funds can be provided by the lender at various points throughout the project. To obtain approval, the borrower will typically require a completed set of plans, a detailed cost estimate (budget), and an experienced contractor.
Hard Money Loans
In general, hard money loans are typically secured using a borrower’s property values rather than solely based upon the borrower’s credit score. While hard money loans provide for an expedited approval process, they also carry high interest rates and short-term repayment options.
Compare Before You Commit
When you are looking at all the different types of commercial real estate loans, don’t just consider the advertised interest rates. You should compare:
- Loan term and repayment schedule
- Down payment and closing costs
- Fixed or variable interest rate
- Prepayment fees and other charges
- Required credit score and property income
Choose Financing That Supports Your Plan
Your choice of loan should be based upon how you intend to utilize the property, what amount of money you are able to pay back, and for what length of time you plan to own the property. Read over the terms of the loan carefully and discuss your options with an experienced mortgage professional prior to signing. If you find a loan that matches your needs, then you have found a way to achieve your property ownership objectives while maintaining sufficient cash flow for your business.
