Investing in real estate can support your company’s healthy growth, whether you plan to create a customized facility or build multiple streams of income. With a business real estate loan, you can expand to a new location, renovate your existing location or purchase the equipment you need to meet new objectives for your enterprise.
What Is a Business Real Estate Loan?
Also called a commercial real estate loan, this type of financing allows the borrower to buy or renovate commercial real estate. Examples of commercial properties include warehouses, factories, office buildings, shopping centers, apartment buildings and multi-use developments.
If your business qualifies for a loan, the lender considers the property collateral for the loan. The value of the real estate serves as security for the loan.
Types of Business Real Estate Loans
When shopping for commercial real estate financing for your company, you should look for a lender that fits your distinctive needs. These real estate loans come with diverse terms and conditions, so it’s important to review the interest rate, fees, eligibility requirements, available funding amounts, and other considerations when looking at lenders.
Traditional Commercial Mortgages
Traditional commercial real estate loans from major financing companies typically offer the most competitive interest rates, highest available amounts, and longest terms. However, they also tend to have the strictest qualification requirements, so your small business should have good credit to apply.
SBA loans have backing from the U.S. Small Business Administration. This federal program offers two different loans that companies can use for real estate. The SBA 7(a) loan is a versatile option that allows both purchase and renovation of commercial properties. Your business can potentially access up to $5 million, payable over 25 years at an interest rate of about 7% to 9.5%.
The SBA 504 loan specifically funds real estate, equipment, commercial property, and other major capital purchases. Interest rates range from 4% to 7% for a term of up to 25 years. You can potentially borrow up to $5.5 million with this type of loan. An SBA 504 loan requires a 10% down payment. About 50% of the purchase price comes from a private lender, while the other 40% comes from an investment firm called a certified development company.
Bridge loans offer short-term financing for real estate purchases. Typically, the borrower uses this high-interest loan to capitalize on an immediate opportunity. After securing the property, the company can either repay the bridge loan or refinance it into a long-term commercial real estate loan. Short-term real estate loans offer funding of up to $250,000 and terms of three to 18 months. However, interest usually exceeds 10%.
Hard money loans are another short-term option for commercial real estate borrowers. These loans tend to have higher interest rates than traditional and SBA business loans. The lender secures the financing with collateral, such as another piece of property or asset of value.
How To Use Commercial Real Estate Loans
Commercial real estate loans can serve a range of purposes for your growing business. You can buy a new property, purchase land, finance equipment or renovate your firm’s existing properties. In general, business property loans work like other types of mortgages, but it’s important for investors to become familiar with some key differences.
Qualifying for a Loan
For residential real estate loans, individuals can access bank financing for up to 97% of the property value or even 100% in some cases. Commercial real estate loans have a much lower loan-to-value ratio, meaning you can only borrow up to 70% to 80% of the property’s value depending on the total loan amount and other factors. That means small business owners should plan to have a down payment of at least 20% for this type of real estate purchase.
In addition to your business credit score, commercial real estate financing companies will review your debt service coverage ratio. This cash flow measurement looks at your ability to repay the loan amount in question. To calculate your company’s DSCR, divide the total amount of your yearly credit card and debt payments by your company’s yearly net operating income.
Some lenders may also require a small business owner or another company representative to personally guarantee a commercial real estate loan. That means you agree to personally make the monthly payments on the loan if the business goes bankrupt or otherwise cannot pay its real estate debt. You might face this type of decision if you have a new business without a strong credit history or with a low credit score.
When shopping for commercial real estate loans, consider the offerings from American United Federal Credit Union. Though we’ve been in business for decades, we haven’t forgotten our mission to bring underserved members the products and services they need for smart financial management. Get in touch today to learn more about credit union membership in Utah.