Loans can come in all different shapes and sizes and it can be hard to keep track of them all. The older you become, the more like you are to hear the word “loan” thrown around.
If you’ve gone through any kind of schooling within the past few years, then you’re probably all too familiar with student loans. It makes sense that loans usually come with a negative connotation and many people are somewhat scared to approach them.
When it comes to other loans, you’re surely more familiar with car loans or mortgages. Those are much easier to understand and at least you get to enjoy the car and your house while paying it all off.
You might not be familiar with commercial real estate loans. The name sounds easy enough to understand, but exactly what is it and why would you ever need one? Keep reading below to find out.
What is a commercial real estate loan?
Before we run, let’s start walking. A commercial real estate loan is used to purchase a new piece of property for your business or built an addition to your current workspace. This can be a warehouse, additional storefront or expanded office space. They’re on the rise across the United States after having dipped in from 2009-2013.
You could also be renovating your existing space without adding an additional room. Basically, anything that is connected with your physical workspace could be eligible for a commercial real estate loan.
It’s not used for making any upgrades to your business, like buying everyone new computers, upgrading your server room or giving everybody a raise, although that would be great.
The loans themselves are different from regular loans you’re used to. While many property mortgages are 30 years, the usual commercial real estate loan tends to be around 20. The loans are not tied directly to the property, but they are granted by “liens” on the commercial property.
So that brings us to our next question: what in the world is “liens”?
Digging into the legal textbook, liens is the right that the property owner gives to a creditor as a guarantee for the repayment of the commercial real estate loan. Basically, it gives the commercial real estate lender all the protection they need in the event that you are unable to pay the loan back.
Securing the Loan
Unfortunately, acquiring the loan is a bit more difficult than the 2008 Jim Carrey “movie” Yes Man, would have you believe. You’re not going to walk into the bank and get an immediate yes with your request.
Before you start looking for loan options, you’re going to want to have all of your numbers memorized. Hopefully, you’ve been a diligent bookkeeper over the past few years. Lenders are going to be looking at your business finances, personal finances (if you’re a small or new business) and information about the property.
In addition, grab your tax information, cash flow projections, credit reports, business licensure and just about anything you can think of. Double-check with an accountant and make a lot of copies.
Where to Go
You’re not wrong in thinking that a bank is the most common option for a commercial real estate loan, but you should do your commercial loan research. Banks often provide some of the best rates you’ll find but are slower and tend to be a bit more hesitant dealing with those who have outstanding credit.
Commercial lenders are a popular option for those who avoid banks. The closing costs are a bit cheaper and the laundry list of requirements looks more like half of a laundry list. They do have higher interest rates and are not as flexible on the type of loans.
Commercial lenders may ask you to take on what’s called a balloon payment loan. Balloon payment loans last between five and seven years, paying it off like it was a 30-year mortgage until the end of the loan when you’ll be required to make huge payments. This is quite a risky loan and one that will need a lot of thinking before committing to it.
If neither of these tickles your fancy, there are also conduit and hard-money lenders. Much less used than our previous two but offer their own advantages and disadvantages as well.