Commercial Real Estate Loan Basics
Are you looking to purchase commercial real estate property for your business? It can be very exciting to begin this new journey, but also very stressful. When you are expanding your business or looking to renovate your current office, it can be overwhelming for the business owner. It’s a good idea to plan ahead of time to avoid getting swallowed up by the process. It’s always smart to research your best options for commercial property loans, and below is a guide that can help you with the basics on acquiring this funding.
Who Needs These Loans?
Commercial property loans are lender-issued funds to be used strictly for business purposes. This means that if you are working out of an office space or retail store, then you qualify as operating on commercial property. Whether you are looking to purchase new property or remodel your current place, you will need to apply for a specialized real estate loan rather than a standard business loan.
How Do These Loans Work?
The commercial loan is secured by a lien on the commercial property that you are buying. This is just like a residential property loan in terms of the liens. A lien means that you are giving the lender a legal right to the property in case you default on the loan. If this happens, then the bank will seize the property to cover the unpaid debt. This is one way that your lender is able to protect themselves in case you are not able to pay back the money you owe.
When you borrow money for your business venture, you will be required to put your business property down to cover the lien. The bank will also expect you to pay a down payment as well. Most banks will not fund your loan without a down payment of at least 20 % of the purchase price.
There are several options when it comes to the repayment terms. You can choose an amortized loan or you can choose a balloon loan. An amortized loan has fixed monthly payments and a balloon commercial real estate loan requires you to make a large payment at the end of the loan to cover the remaining principal.
Just keep in mind, that a commercial real estate loan will come with higher interest rates than the standard residual mortgage.