Operating in a cutthroat industry is tough, but it’s even tougher if you don’t have sufficient funds to back you up. Competitors with deeper pockets make it harder for small businesses to stand out from the crowd. Applying for real estate loans for business gives you a competitive advantage.
Whether you’re starting your business or you’re working on your latest project, having funds readily available makes everything easier.
If you’re buying commercial real estate, securing the right loan will lower the cost and give you additional financial flexibility. On the other hand, if you already have your own business real estate, real estate loans for business lets you increase cash flow, improve operations, and pay for other expenses.
Whatever you need, there’s a business loan for you. With that said, here are four of the most common types of real estate loans for business:
1. SBA 7(a) Loan
The Small Business Administration (SBA) created SBA loans to help small businesses secure bank-rate financing. The SBA 7(a) loans and SBA 504 loans are two of the most popular loans business owners can use to fund real estate purchases.
Many business owners apply for SBA 7(a) loans because of its flexibility. You can use it to purchase or refinance owner-occupied commercial real estate. If you qualify for one, you can receive up to $5 million.
To qualify for SBA 7(a) loans, lenders may ask you for a down payment of at least 10% of the purchase price. You should also have a credit score of at least 680 (the higher, the better) and your business should have been operating for at least three years. Repayment terms often last over 10 to 25 years with rates ranging from 5% to 8%.
Additionally, the property should be 51% owner-occupied or you should occupy more than half of the property. You can use this space for your own business or your tenants.
2. SBA 504 Loans
The SBA 504 loans are similar to the 7(a) loans but less flexible and do not have a maximum loan amount. You can use the funds from the loan for up to 90% of the purchase price of the property.
With SBA 504 loans, the repayment terms often last up to 20 years if you use it for commercial real estate and 10 years for equipment purchases. The interest rates vary between 3.5% and 5%. Similar to SBA 7(a) loans, you need to occupy at least 51% of the space to qualify for 504 loans.
3. Commercial Bridge Loans
Commercial bridge loans are a short-term financing solution often used for debt service while business owners lease, refinance, improves, or completes a commercial real estate transaction. It’s a short-term loan for short-term needs.
For example, if you have a balloon payment coming, you can use the funds from a bridge loan to pay for that before you refinance it into a long-term loan with more favorable terms.
However, this short-term feature comes at a price. Commercial bridge loans charge higher interest rates compared to more traditional loans. The interest rates also fluctuate depending on the nature of the transaction. Generally, most lenders grant a 6 to 12 months’ worth of cash before repayment is due.
4. Hard Money Loans
The funds from hard money loans come from a private individual or a group, unlike other financing solutions. Since business owners don’t have to go through stringent corporate procedures, hard money loans offer faster funding and have lenient qualifying requirements. Compared to typical lenders, hard money lenders are often more open to funding risky projects.
These lenders are willing to take on the risk based on the value of your property rather than your credit rating. But just like bridge loans, hard money loans are often short-lived. Make sure that you can repay the loan quickly before the deadline. These loans often have extremely high-interest rates and require a considerable down payment or collateral.
Final Thoughts on Real Estate Loans for Business
As we’ve already established, whatever real estate venture you’re getting into, there’s a loan for your needs. Thanks to alternative lenders, you can easily access additional working capital with loans tailored to your company’s needs.
Whether you need to expand your operations, refinance commercial mortgage, or purchase a new property, it’s important to know your options. Evaluate your business, know your options, and find out how each one affects your finances. In this way, you’re able to make a smart decision that will drive your business forward.