Buying a new place for your business or renovating your current location can be extremely exciting for your business, however it is important to know the ins and outs of commercial loans before you get too far into it.
A commercial real estate loan is a loan taken out by a BUSINESS, not an individual. Whether yours is a business that is operated out of a retail store or office space, or you are looking to purchase a new commercial property, it is all commercial real estate and requires a CRE loan (as well as any construction or developments thereafter).
These are mortgage loans in which you agree to repay the loan and if not, the property can be seized by the creditor (this is called a lein or a legal right that the owner gives the creditor which serves as a guarantee for the repayment of the loan). You can expect this to be a part of your loan, but you should also have a downpayment of 20-30% to put down on the property.
So what is the difference between a commercial and residential real estate loans? Generally on a residential loan you have a certain amount you pay each month over a period of time- 35 years for instance. Commercial loans have two types of terms: One is an intermediate- term loan in which you pay the loan in 3 years or fewer, and the second is a long-term loan, generally between 5 and 20 years. These could be offered as amortized loans (repaid in fixed installments until it is done plus interest) or a balloon loan (make one big payment at the end to pay principal plus imputed interest). Only choose a balloon loan if you know you are able to pay that large amount of money at the end, otherwise you may find yourself needing to sell the business or refinance the loan.
What other costs do I need to consider before applying for a loan? Interest rates. Commercial loan interest rates can be higher versus residential loans if the business doesn’t have as much credit history as does an individual, and it is riskier for the lender (especially if this is your first business). Another consideration are the added fees. As with a residential property loan, there will generally be upfront fees, covering the appraisal, legal costs, loan application, survey fees etc., as well as fees if you pay your loan off early.
Before committing to a commercial real estate loan, make sure you are in good financial standing, get advice from a financial advisor, and as always ask the lender all of the necessary questions so you aren’t shocked to find out it is more than expected.