When your business needs money to purchase a new property, expand, or refinance an existing loan, it's important to know what types of financing are available and what it takes to get your loan approved fast!
Download this guide to understand which loan is best for your business, what you need to apply, and tips for getting your loan approved.
The value of business real estate has steadily risen since 2010, as an increased number of entrepreneurs, developers, and investors continue to buy commercial property. With more than $2.4 trillion dollars in commercial real estate loans being approved during that first three quarters of 2021, owning and developing business properties continues to be a popular venture. It is clearly a lucrative and stable investment as shown by the Deloitte 2022 Commercial Real Estate Outlook global study that indicates 80 percent of commercial property owners expect a revenue increase in 2022 compared to 2021, and 73 percent anticipate transactions to intensify.
As transactions and revenue increase, business-minded professionals would be wise to investigate opportunities in the commercial real estate space. Given the significant resources required to complete a transaction, industry leaders rely on low-interest rate commercial real estate loan products to help their goals come to fruition. If you are a business visionary interested in improving profits and adding a valuable asset to your portfolio, securing a commercial real estate loan can help make it happen.
Commercial real estate loans offer funding to help you purchase new properties for investment, expand your existing building and square footage, or refinance existing commercial real estate loans. They are secured by collateral — typically the commercial property — and lenders expect the real estate investment to generate revenue to pay for part or all of the loan over time. The range of commercial real estate loan products covers a great deal of ground. Specialized financing can be leveraged to purchase and develop land, purchase fully functional office buildings, expand an existing facility, orchestrate new construction projects, inject cash into an owner-occupied facility, or to refinance an existing commercial real estate loan.
Commercial real estate loans work by providing businesses the funding needed to achieve their goals, and in turn, grow the economy. In many respects, the term “commercial real estate loans” serves as something of a catchall phrase for a wide variety of resources that help business owners purchase property, expand their business, and keep their business growing. With so many loan options available, it’s important to understand the differences between how the funds are delivered, required qualifications, fees, terms, and interest rates between all the options.
Lenders subject commercial real estate loans to heightened scrutiny because they present a higher risk than other products. But by understanding what lenders look for as well as the differences between the commercial real estate loans that are available, at the end of the day, you can feel confident in selecting the best loan for your business while receiving the necessary revenue to accomplish your goals.
It’s essential for industry leaders to conduct thorough due diligence about available financing before targeting a specific type of commercial real estate loan. A traditional lump sum payout may not be the best option for your specific needs. In fact, certain projects may not even qualify for loans structured in this fashion. These rank among the frequently employed commercial real estate loans most lenders make available.
A permanent loan usually serves as the first mortgage used to buy a commercial property. This class of commercial real estate loans generally involves a repayment schedule that ranges from five to 25 years. Many fall on the longer side as borrowers strategically position this overhead element as a low monthly installment. It’s also not uncommon for lenders to underwrite loans for 20 years or less if the property suffers from disrepair. Structured much like a traditional home mortgage, permanent loans are considered minimal-risk products, and they feature affordable low rates.
Another commercial real estate financing option that usually provides a lump sum to qualifying applicants are business term loans. This loan type is all about flexibility. The funds can be used for more purposes in addition to commercial real estate improvements or purchases and the repayment terms are also flexible. A small or mid-sized business may pursue this opportunity because the funds can be deployed to purchase equipment, rehabilitate a structure, and expand a space’s usable square footage. The money may also be leveraged to make strategic business investments that drive growth and profitability.
Much like the name implies, bridge loans help business professionals travel from point A to point B, financially speaking. This commercial real estate loan is designed to provide short-term funding to cover predictable revenue shortfalls or as stop-gap measures, while long-term financing is secured. This class of loan usually comes with relatively high interest rates and truncated repayment schedules, running from six months to three years. Borrowers can anticipate lenders requiring sufficient collateral to approve bridge loans.
A business line of credit works almost precisely like a home equity line of credit. Qualified borrowers generally enjoy low interest rates when opting for this type of funding. Funds are withdrawn to manage commercial necessities, and business professionals can replenish the fund by making timely payments. Unlike other commercial real estate loans, borrowers do not receive a lump sum.
It's crucial to maintain a solid business and personal credit score because lenders place a high value on that metric. Some people and organizations with less than perfect ratings may experience limited loan options. In these cases, they may take out hard money loans as a last resort and pay the higher interest rates and fees.
Another option that provides commercial real estate investors with an opportunity to purchase property regardless of their credit worthiness is owner financing. This occurs when the owner of a property for sale provides part or all the financing to the buyer directly once a substantial down payment has been received. Always make sure to consult with your local trusted lender for help determining which commercial real estate loan will help you accomplish your goals.
For an in-depth view of the most common loan types and how to find the best lender for your business, review our blog "6 Types of Commercial Real Estate Loans."
Developers, investors, and entrepreneurs buy commercial property to augment personal wealth and further goals. The data indicates an increased number of people are securing commercial real estate loans based on lucrative returns on investments and stable revenue streams. People who buy commercial property incur a lower risk than involvement in a sometimes volatile stock market. That being said, every business investment presents benefits and risks. If you want to buy commercial property, it may be prudent to weigh the following pros and cons.
Pros of buying commercial property:
The act of purchasing a commercial building can be something of a game-changer, if everything goes well. That’s precisely why it’s critical to weigh potential cons before you buy commercial property.
Cons of buying commercial property:
This is not to say potential negatives cannot be managed effectively. Outsourcing to a trustworthy property management outfit relieves owners of wide-reaching responsibilities. And by taking out full liability insurance, unfortunate accidents, injuries, or damage are covered.
If you are still unsure if now is the right time to purchase commercial property, review our blog "Ready to Buy Commercial Property? Review the Pros and Cons."
Commercial construction loans reinforce the fact that commercial real estate loan opportunities offer vastly different options. This type of business loan is perfectly geared toward investors and developers who wish to buy commercial property, clear the land, and build.
Individuals and organizations already in possession of a commercial building may also gain approval for this type of financing. The funds can be put to work expanding a non-residential building and rehabilitating an outdated structure, as the loan pays for the cost of materials, labor, architects, and engineering services. While those facets may seem similar to other resources, the way commercial construction loans work is the place they take a different path.
Unlike lump-sum business term loans and business lines of credit, commercial construction loans typically disburse funds based on contractors and suppliers meeting project thresholds. A detailed construction plan and timeline are created, and key stakeholders understand when their portion of the project gets funded.
For instance, landscapers would likely receive a check after the land is cleared, plumbers after their work passes inspection, and contractors involved with lengthy areas of the project see timely payments. Along with disbursing funds periodically, other significant differences include the following.
Potential borrowers can anticipate gathering wide-reaching financial records as the application undergoes substantial vetting. But gaining access to financing and a successful build can yield high returns.
To explore commercial construction loans in more detail, review our blog "Commercial Construction Loans Demystified."
If you are among the many considering purchasing a commercial property and are unsure how to proceed, experienced professionals have carved out methods that deliver results. Choosing the right commercial real estate investing strategies to get you started should be based on your experience, willingness to take risks, financial situation, and long-term goals. These are commercial investing strategies worth considering.
The name may seem somewhat amusing, but the basic principles remain sound. The letters stand for Buy, Rehab, Rent, Refinance, Repeat, and the technique emulates that used by the residential house-flippers made famous on television shows. These are the basic steps.
With the money and profit you receive, repeat the processes by investing in another commercial property.
Purchasing raw land and building is usually reserved for people with experience in the construction trades. This sometimes-high-risk venture can produce lucrative results. It’s also not uncommon for developers and investors to assemble a team of experts and use collateral and cash to secure a commercial construction loan to fully fund the project.
Patient investors who prefer not to take major risks often buy commercial property, make steady improvements, and pay down a commercial real estate loan with rental income. As long as the property essentially pays for itself, rising values and equity position the investment for profitability. The conventional wisdom is that buying today and selling when the market reaches a peak maximizes investor profits.
These rank among the popular commercial real estate investing strategies that have been proven successful under the right conditions.
For additional investment strategies and tips on finding the right sites, review our blog "Commercial Real Estate Investing Strategies for Beginners."
Gaining approval for a commercial real estate loan often proves a pivotal moment. That’s why it’s critical to be prepared to provide pertinent supporting information, financial records, and take any proactive measures available to improve your commercial real estate loan application.
For a full understanding of what lenders will be looking for on your application, review our blog "Commercial Real Estate Loans: What do Lenders Look For?"
The most important tried-and-true method involves looking at the process from the lens of an underwriter. By placing yourself and your business under a microscope, and employing the following strategies, you can improve your approval chances.
If your application appears borderline after thinking about it from the underwriter’s perspective, it may make sense to reduce the loan amount. Working within your approval bandwidth on your next loan, and then making on-time payments, will likely lead to greater opportunities.
For more tips to help your loan application get approved, review our blog "6 Reliable Tips To Get Your Commercial Real Estate Loan Approved."
The commercial real estate loan evaluation process tends to be quite rigorous. Borrowers must produce a significant amount of supporting documents that speak to their personal financial portfolio and that of the business entity. To simplify the efforts to prepare ahead of a meeting with a lender, it may prove fruitful to put together two separate folders. One pulls together the personal information an underwriter requires. The other focuses purely on business documents.
When compiling this information, imagine it from an objective point of view. Ask yourself whether someone with this level of credit, debt, income, and assets makes a good loan candidate. If you are unsure, always reach out to your local trusted lender before applying for a commercial real estate loan.
Creating a clear and accurate picture of a company’s financial health and stability often proves challenging. That’s why loan processors task borrowers with gathering wide-reaching documents to support a commercial loan application. These rank among the standard items loan underwriters request.
If you are applying for a commercial construction loan product, additional information will be necessary. These involve construction costs, project type, population density, demographics, and revenue expectations upon completion. As a first-time commercial real estate loan borrower, don’t hesitate to schedule an appointment or contact a reliable local lender to ensure you have the documentation and the resources needed to get the additional funding you are looking for.
For an application checklist to help you prepare the necessary paperwork, review our "Commercial Real Estate Loans: Application Checklist."
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