You decided to start a business, but now you need a location to purchase. Or maybe you’re already a business owner and want to grow your company.
Either way, you’re going to need a real estate loan to purchase the property. So after you’ve found the perfect location, it’s time to start shopping around for a lender with the best commercial mortgage rates.
But before you begin your search, there are some things you should know first. Here’s a quick guide to help get you up to speed with everything to do with commercial loans.
What Are Commercial Loans?
There’s residential real estate, then there’s commercial real estate. In the commercial sector, you’ll find properties, such as office building, storefronts, and restaurants. Wherever an owner conducts their business is considered commercial property.
And like with houses and condos, you have to obtain a loan to purchase one (unless you have the cash to pay upfront). You can also use a commercial real estate loan to help pay for new constructions.
These loans are typically available to limited liability companies and s-corporations.
So if you’re an individual, it’s nearly impossible to get approved for a commercial real estate loan.
So How Do Commercial Loans Work?
We know that commercial loans help pay for wherever you plan to operate your business. But how exactly do these work? Are they similar to house mortgages?
In a nutshell, what makes commercial loans a little bit different is the fact they require collateral. So the loan you obtain is secured by liens placed on the property you’re trying to purchase.
If you fail to pay off the loan or miss one too many payments, then the lender or financial institution can come and snatch up your property.
This acts as a guarantee for the repayment of the loan. Then when the lender seizes the asset, you have a time frame to get it back or lose it forever.
Commercial loans also require a high down payment, which is normally between 20% and 30% of the property’s purchase price.
Now, let’s get into the fine details of the inner workings of a commercial loan.
The Repayment Terms
What you’re likely used to are the terms associated with residential loans, where you make regular payments over the course of 15, 20 or 30 years.
But with commercial loans, things are a bit different. For one, there are two different term options: intermediate-term loans (3 or fewer years) and long-term loans (5-20 years).
You may find good commercial mortgage rates on an amortized loan or a balloon loan.
With the amortized commercial loan, it’s like a house loan. You make installments for the length of the loan. However, with the balloon loan, you’re required to make a big payment at the end to pay off the remainder owed.
Since you’re already familiar with amortized loans, we’ll dive deeper into balloon loans.
How Do Balloon Loans Work?
These loans are tricky, to say the least. Normally, the terms on balloon loans are between 5 and 7 years. But what you have to pay attention to is how the payments are set up. The payments are calculated as though it is a traditional 30-year loan.
So your monthly payments aren’t too high, but then at the end of the 5- or 7-year term, you have to pay the balance in full.
It’s best to avoid this type of loan unless you feel very confident that your business will take off and can cover the balloon payment at the end of the term.
Commercial Mortgage Rates
The interest rate of your loan is critical to your ability to repay it. And what determines your commercial mortgage rate is the type of business you own, your creditworthiness and financial wellbeing.
Generally, commercial mortgage rates are much higher than typical interest rates you’ll find on a house mortgage. Why? Because lenders find commercial loans riskier, especially for startups and businesses with a less-established credit history.
Then, of course, the lender you choose will also determine the type of commercial mortgage rates you get.
For instance, life insurers may offer rates between 3.35% and 4.3%, while banks and credit unions offer between 3.35% and 6%. This is just an example since interest rates are ever-changing.
What also determines your interest rate is your loan-to-value (LTV) ratio. In this formula, you measure the loan value against the property’s value.
So if the property you’re buying is $100k and you put down 20-30%, then the LTV ratio is 70-80%.
When your LTV is high, your interest rate is high and vice versa. So the key is to put as high of a down payment as you possibly can to get your interest rate as low as possible.
The Fees On Commercial Loans
Interest rates aren’t the only extra charges you have to worry about with commercial loans. There are other fees tacked on as well. In most cases, these fees are upfront.
For example, you may have to pay expenses for property appraisals, legal costs, loan origination, loan application and survey fees. In some instances, the lender will spread out the payments annually instead of asking for it upfront.
Then it’s important to ask about prepayment penalties — where you’re penalized for paying off the loan faster than the term.
Lenders make more over the course of years. So the longer the loan, the more money they potentially earn.
Finding Good Commercial Mortgage Rates
Now, there are different types of lenders you can approach for your business loan. For example, you have portfolio lenders, insurance companies, SBA loans, private lenders, CMBS lenders, Government Agency Lenders, credit unions and banks.
If you’re worried about your bad credit or lack thereof, then you should consider a lender like Hard Money Georgia. Here, you can find hard money lenders, private money lenders, loans for bad credit and various other asset-based loan financing.
Contact us today to see how we can help fund your business ideas and turn them into a reality!