Tips for Financing Commercial Real Estate
If you’re a business owner looking to open your first physical storefront or expand to a second location, chances are that you’re in the market for a commercial real estate loan. Like a home mortgage, this type of loan can help you to purchase a store outright. It can also help you to afford an expansion or upgrades to your current location or invest in specialized equipment that you need to run your business successfully.
While similar to a home mortgage loan, a loan for commercial real estate can be more challenging to obtain. Here’s what you need to know to get the financing you need.
Types of Loans
There are various types of commercial loans, and they’re all very different from one another. Each type has its own uses, terms, and rates. The following are some types of commercial loans to consider:
- Interest-only: Also known as balloon loans, these loans have a smaller interest rate early on but have a larger final payment later on (typically in 3 to 7 years).
- Long-term fixed-interest mortgage: This type of loan works much like a home mortgage, but has a 20-year term instead of the home loan’s typical 30-year term.
- Hard money loan: This type of loan comes from private investors, and it tends to be based on the value of the property.
- Bridge loan: A more lenient version of a hard money loan, a bridge loan has more favorable rates and better terms.
What Lenders Look For in an Applicant
Before you apply for a commercial real estate loan, you will need to look at a potential lender’s requirements to ensure that you can meet them. Some of the things that lenders look at include:
- Business finances
- Personal finances
- The property itself, which acts as collateral
Tips for Getting the Financing You Need
A loan for commercial real estate requires a significant amount of documentation. Having the information ahead of time can help to make the process easier:
- Credit reports
- Tax returns
- Projected finances
- Business information, including certification as a corporation or LLC
- Your business plan
- An appraisal of the property you plan to purchase
If you don’t quite meet the requirements of a traditional lender, you still have some options. You could look into an SBA 7(a) or 504 loan. You could also take steps to improve your credit score, bring in additional partners, or offer a larger downpayment.
A commercial real estate loan can be more challenging to obtain, but it’s not impossible. Being prepared with the right documents and having the right people on your team can help the process go more smoothly.
