Is it possible to take out a small business loan for real estate?
Finding a good commercial real estate can be a good opportunity for you as a business owner. This is quite handy, especially if you plan to renovate or expand your brick-and-mortar business. Although renovating or buying a new space can be a costly endeavor, it is indeed possible.
You have two options when upgrading your commercial space. One is to save up some cash over time until you have enough to push through with your goals, the other is to take out a loan.
But, is the latter a wise move?
Is it a good idea to take out a commercial real estate loan?
Getting a real estate loan is considered a good option for small business owners who need sufficient access to enough capital for their real estate goals. The main reason why taking out a commercial real estate loan is a good idea is that buying or even just renting commercial real estate upfront can be very expensive. It can range from thousands to millions of dollars.
When it comes to your loan application process, you might need to present why you need the amount you have applied for. Besides that, you might also need to consider the fees and other expenses carried into your loan.
It is vital to know that investing money into your commercial real estate needs careful planning and preparation. This also includes finding the right real estate you should invest in. To help you out, you can opt to search for Simon Posen or any other realtor that might help you out. Furthermore, your renovation or expansion should bring a return on investment for your business that equals or exceeds (even better) what you have spent on taking out the loan.
Types of commercial real estate loans
Not all commercial real estate loans are alike. A variety of agencies and lenders can offer you different terms that might reduce your costs by thousands of dollars. Some might even ask only for a smaller down payment upfront. The following are some types of commercial real estate loans you might want to consider:
Traditional commercial real estate loan
Traditional commercial real estate loans are what you get from banks. They process this just like other business loans. Moreover, real estate loans from banks most likely provide the most money with the lowest interest rate of any financing option you can look for.
However, one of its drawbacks is that it is quite challenging to qualify for. Banks tend to require you to present an excellent business and personal credit score. They might also need you to have a strong and smooth running business that has been operating for quite some time.
Small business administration (SBA) commercial real estate loan
Most of the time, small business owners turn to the SBA if a bank turns down their real estate loan application. The SBA can offer you two loan options that can help you out. One is the SBA 7(a) Loan for Commercial Real Estate, while the other is the SBA 504 Loan.
- SBA 7 (a) Loan
When it comes to this loan, the government will back the loan for small businesses. This is in order to make lenders less concerned about the risks of providing loans to small business owners. Moreover, this type of loan is not limited to commercial real estate. In fact, they can be used for countless business initiatives.
Under SBA 7 (a) loan, business owners usually can get up to $5 million in total. Not only that, but this SBA loan program most likely carries favorable interest rates. Furthermore, this type of loan is fully amortized. This means the payment will be the same amount every month up until the end of the loan term.
- SBA 504 Loan
Unlike SBA 7 (a) loans, SBA 504 loans are intended specifically for commercial real estate. When it comes to this type of loan, business owners will receive two different loans intended for their property.
The first loan is for the 40% property value. This will be provided by a Certified Development Company (CDC). CDCs are nonprofits that offer small business owners low-interest rate loans. Moreover, their goal is to promote economic development throughout the whole country.
The second loan, however, is for 50% of the property value. This will be provided by the bank. Moreover, the interest rates will vary depending on the bank, and they might be higher than the ones provided by CDCs.
The remaining 10% will be your down payment on the chosen property. Under the SBA 504 loan, you will get low-interest rates (especially when it comes to those provided by CDCs) and a 20-year term. Not only that, but this loan program also offers full amortization.
Hard money real estate loan
This type of loan is also known as a short-term loan. It is acquired from investors and private lenders. Most of the time, hard money loans are only for smaller amounts. They also tend to carry higher interest rates than from the SBA or a traditional bank.
On the bright side, hard money loans typically come with easier qualifications compared to bank loans. New small business owners tend to find it quite challenging to present a good credit score or strong business history. That is why they love to take advantage of hard money loans.
Soft money loans
Soft money loans are not the exact opposite of hard money loans. They are a type of funding category that hard money lenders usually mention. Moreover, they can be classified as traditional loans that tend to have below-market interest rates.
One of the biggest factors in determining your soft money loan approval is your creditworthiness. To qualify, you might need to prove to the lender that you will be able to repay the loan. Also, lenders might require collateral (which is the commercial real estate itself).
To wrap it up
Looking for a good commercial real estate property can allow your business to grow and expand. Whether it would be best to take out a real estate loan for your business or not depends on your needs as a business owner. Furthermore, you should always consider the type of loan, costs of your chosen commercial real estate, and other factors like the set period you have to pay the loan in full.