Commercial loans are meant to help you business grow. No matter what you’re looking to finance — from real estate to equipment — a commercial loan may benefit your business. There are a number of lenders out there, so determine the type of loan you need and compare loan offers with a critical eye.
What are commercial loans?
Commercial loans are taken out by an individual, partnership and other groups on behalf of a business or company. They are used to fund commercial activities that can help grow and develop a business, though most are usually taken out for real estate purchases.
Because the loan amount is intended for growing the business, a lender will consider your business financials when deciding whether to approve the loan. Loan amounts vary based on your business and what you need to fund, but repayment options are flexible to support fluctuations in cash flow.
In addition to going through a traditional bank, you can apply online for a commercial loan.
Top business lenders offering online commercial loans
Range of options. A variety of lenders offer a diverse products to suit most companies, budgets and needs.
Flexible repayments. Commercial loans consider a business’s cash flow to avoid issues when paying the loan back over time.
Improve your credit rating. Timely repayments can positively affect your business’s overall credit report.
Drawbacks of commercial loans
Can be difficult to qualify for. If you’re new to business, it can be hard to have the credit required for approval. In this case, you may want to consider a startup loan instead.
May consider your personal credit. You’ll typically need to provide your personal financial details, including your credit report, annual income and open debts. This information can affect eligibility.
Long application process. Given the risk for potential commercial lenders, you’ll need to provide a thorough picture of your business’s financial health — cash flow reports, projected revenues and any other risks.
Important note about repayments
When taking on a commercial loan, consider that any defaults or late payments could be listed on your business’s credit report, seriously affecting the future borrowing power of your business. Avoid applying for a loan that your business won’t be able to pay back and have a solid financial plan of how you’ll incorporate the added expense of loan repayments into your business budget.
How to compare commercial loans
Loan terms. Loan terms vary by lender but generally last between 5 to 20 years. Variable-rate commercial loans are more common than fixed-rate loans.
Loan amount. Commercial loan amounts are usually larger than you’ll find with other loans. The amount you’re ultimately approved for will depend on what the lender thinks your business can afford to pay back.
Repayments. Most commercial lenders offer flexible repayment solutions so that the loan doesn’t interfere too heavily with cash flow. Take a look at your repayment options, such as whether the lender allows for interest-only repayments during seasonal lows.
Commercial loans for real estate
If you’re looking to invest in a commercial property, you’ll generally look at real estate designed for use as an office, retail or industrial space. Unlike residential property, which has relatively low risks but offers lower returns, commercial property has the chance of a bigger return on investment — but at a higher risk.
Buying commercial property is also more expensive, and maintaining or upgrading it can potentially cost you tens of thousands of dollars. In addition, commercial properties typically experience higher vacancy rates, representing a higher risk over residential properties. Because of this, you may face a higher interest rate when you look to buy property with a commercial loan.
And unlike residential mortgages, commercial property loans last for 5 to 20 years. This is often accompanied by balloon payments, meaning you make small monthly payments for a set number of years before paying off the principal in one lump sum.
What’s the difference between purchasing commercial and residential properties?
Purchasing a residential property is a more familiar process, so it’s useful to know the key differences you’ll encounter when purchasing commercial real estate.
Longer property leases. Residential leases are typically by year, while commercial property leases can run anywhere from 5 to 10 years.
Owner isn’t responsible for maintenance. Commercial properties feature longer vacancy periods, and the lessee bears the costs of maintenance, rates and repairs — which means you get to pocket more of the rent as profit. In residential properties, the property owner is responsible for these expenses.
Capital gains come into play. Commercial properties used for running a business are subject to capital gains tax when sold. To determine your capital gain (or loss), you’ll need to possess clear records and costs for purchasing the property.
5 tips for making your commercial property purchase
While every situation is different, you can smooth the process of purchasing commercial properties with a few general tips:
Evaluate the risks and the benefits before proceeding with the transaction.
Rely on the advice of experts such as lawyers, accountants, commercial realtors and mortgage brokers.
After confirming applicable zoning laws and development plans, pick a suitable property with a clear title.
Confirm that your funds are sufficient for covering the deposit and that you can provide proof of a regular income or revenue stream that can meet potential monthly payments.
Carefully read through every detail of the sales agreement to understand your rights and obligations.
What other types of loans are available to purchase commercial property?
Investing in commercial real estate has several benefits, but it involves a significant investment of time and money. Here are the types of loans available if you’re looking for financing.
Property development and construction loans. Useful for constructing commercial properties, residences and subdivisions. You could use it for completing a development project, and then sell the assets to repay your loan.
Subdivision financing. Subdividing land can help you increase the value of your property without constructing anything on it, but these loans can also be used for construction purposes.
Loans for buying a business. Use these business loans to purchase an existing business or a successful franchise, consider the business’s history, the value of its tangible assets, the estimated value of its intangible assets and the ability to yield good returns on your investment.
Factory financing. Useful for keeping organizations in business by helping them purchase equipment and technology. From production equipment to packaging materials, this loan can help you use your capital to meet other expenses while funding your working capital requirements.
Land bank financing. If you see abandoned properties and vacant lots as assets, these loans could be ideal. They can let you create, hold and develop vacant properties and then convert them into marketable assets that can double or triple your investment.
Rural property loans. Designed to purchase property in a rural region, these loans allow you to purchase a property or to consolidate your debts.
Frequently asked questions
If the property itself is to be leased by businesses, then yes. Examples of this include warehouses, office buildings and retail stores. If the property is residential such as a house or apartment building, then no. If you’d like to purchase a residential property for investment, you could consider investment property loans.
Lines of credit provide ongoing access to a credit limit while fixed-term loans provide a lump sum to be paid back in monthly installment. Compare even more features here.
Aliyyah Camp is a writer and personal finance blogger who helps readers compare personal, student, car and business loans. Aliyyah earned a BA in communication from the University of Pennsylvania and is based in New York, where she enjoys movies and running outdoors.
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