Mortgages for Businesses: A Real Estate Guide

Mortgages for Businesses

So, maybe you’re dreaming big—thinking about growing your business or diving into the commercial property market. The world of real estate awaits, but there’s one key player you need to get familiar with first – mortgages for businesses. 

These aren’t just any loans; they’re your gateway to owning that office space or retail store you’ve been eyeing. But before visions of grand openings start dancing in your head, let’s break down what it really takes to secure one of these financial power-ups.

Dive Deeper into Your Real Estate Potential: As the founder and CEO of eFunder, I bring my extensive experience in real estate and commercial mortgages to enhance your investment strategy. Stay tuned for actionable insights, and don’t miss the exclusive offer at the end of this article, designed to revolutionize your lead generation approach.

Table Of Contents:

What is Commercial Real Estate Loans? 

A commercial real estate loan, also known as a business mortgage, is a loan for property used for commercial purposes. The collateral for the mortgage can partially be the building itself, whether that’s an office, retail space, apartment building, warehouse or other development.

As you take a closer look at what commercial real estate loans are, how they work and what types you can get, you might also consider finding a financial advisor who can provide you with hands-on guidance throughout the process.

The Functioning of Commercial Real Estate Loans

Commercial mortgage loans are viewed differently by lenders than residential loans. Home loan lenders look strictly at the borrower’s income and credit in order to qualify.

Commercial mortgage lenders look at the subject property’s rent roll, operating statements, and other factors to determine the cash flow or net income potential. Very strong (low risk) commercial mortgage loans might be priced lower than home loans, while weaker performing properties (higher risk) might be priced higher.

While residential mortgages are typically made to individual borrowers, commercial real estate loans are often made to business entities (e.g., corporations, developers, limited partnerships, funds, and trusts). These entities are often formed for the specific purpose of owning commercial real estate.

Acquiring a Commercial Real Estate Loan

Just as with home mortgages, banks and independent lenders are actively involved in making loans on commercial real estate. Also, insurance companies, pension funds, private investors, and other sources, including the U.S. Small Business Administration’s 504 Loan program, provide capital for commercial real estate.

Here, we take a look at commercial real estate loans, how they differ from residential loans, their characteristics, and what lenders look for.

Different Types of Commercial Real Estate Loans

Let’s look at some common types of commercial loans and how they’re used.

Permanent Loans and Their Benefits

Your commercial property can be a valuable source of equity used to remodel or expand your growing business. Owner-occupied mortgage financing is ideal for retrofitting a location to better suit the needs of your business, or purchasing a new space, all while building equity without the uncertainty of renting or leasing.

  • Rates are fixed for the specified term, and we offer a discount if the payment is automatically deducted from your First Commonwealth Business checking account each month.
  • We offer commercial mortgage loans in amounts as low as $25,000.
  • For owner-occupied real estate, we can finance up to 80% of the appraised value or purchase price, whichever is lower. If you are doing building improvements, we will use the purchase price plus the value of the improvements.

Exploring Small Business Administration (SBA) Loans

Small Business Administration (SBA) options are available for owner-occupied commercial real estate loans. We offer these loans to those who occupy most of a commercial property.

One of our bankers can explain the portion of a commercial building you must own or currently work out of in order to qualify. Our professionals can arrange owner-occupied commercial real estate loans around spaces such as offices, retail stores, industrial buildings, health care buildings and others.

Hard Money Loans: What You Need to Know

An owner-occupied commercial real estate loan makes sense for professionals who currently own or want to own their property and do not want the risks associated with leasing out space to other parties.

In some cases, you could qualify for tax write-offs you’d otherwise be unable to get with renting a space for your operations. Owner-occupied commercial real estate loans help you plan for your company’s future.

If you’d like to sell your business down the road, you can skip the negotiation process with other parties necessary to finalize the change in ownership of a building. You can get the funding you need to expand with fewer obstacles by applying for the right commercial real estate loan for your applications.

Commercial Construction Loans: An Overview

Commercial real estate is an asset for your business. Holding onto real estate equity with our flexible loans can give you a competitive advantage over others in your industry who share a commercial property or move between spaces regularly.

If you’re game for a bit of adventure and ready to take on the roles that come with renting or leasing your place out to others, whether they’re individuals, families, or even businesses, diving into investment properties could really ramp up your growth strategy.

By researching the type of investment property you’d like to purchase, whether that be rental homes or office space, you’ll have a full view of the benefits and risks involved with that property. Our team would love to consult with you to make sure your mortgage financing best positions you to have income-producing properties.

  • Your rates will be fixed for the specified term, and we offer a discount if the payment is automatically taken from your First Commonwealth business checking account each month.
  • We offer commercial mortgage loans of $25,000 or more.

Let’s walk through the process of getting a commercial mortgage loan, from figuring out if you need one to choosing a lender and applying.

Who Needs a Commercial Mortgage Loan?

Every business needs a place to do business. For some entrepreneurs, that place of business ends up being their homes.

But the majority of small business owners need an office, warehouse, or storefront to conduct their business in. Investment properties for your business can be an excellent source of cash flow.

We work with individuals who want to acquire properties for rental income or renovate and sell later for a profit. With our assistance, you’re on your way to owning a piece of the action—whether that’s office spaces, housing units, industrial setups, retail spots or any property that puts money in your pocket.

Choosing the Right Commercial Mortgage Loan Lender

When dealing with small businesses that are controlled by a single owner, a family, or a small group of private investors, the personal finances of the business owners play an important role.

This means the personal credit scores of these individuals will be looked at, as well as whether they have any bridge loans, tax liens, foreclosures, or defaults that may affect their ability to pay back the commercial mortgage.

Acquire the commercial properties you want without depleting your savings. Speaking to one of our experts is a proactive way to learn more about how a commercial investment property loan can work for your goals.

Applying for a Commercial Mortgage Loan: A Step-by-Step Guide

There are few things more exciting than partnering with local commercial mortgage broker and business owners to build commercial properties from the ground up, as we know these investments in our business community yield a significant impact on our communities.

Thanks to our professionals, you can get the funding you need to create your dream workspace. Tell us more about your specific vision for construction projects, and we can organize commercial construction loans for new structures in western and central Pennsylvania.

Whether you’re planning for a renovation job or something bigger, we can help you secure a loan with flexible terms. Learn more about our commercial construction loan solutions:

  • You’ve got options here – either spruce up what you already own or break ground on something entirely new.
  • We approve loans for as little as $50,000.
  • You can get funds disbursed throughout construction periods instead of all at once.
  • Ask us about structured repayment plans to expand your business on the right note.
 
Key Takeaway: Getting a commercial real estate loan is more than just buying property; it’s an investment in your business’s future. From owner-occupied to construction loans, there are various types that suit different needs. Our team guides you through choosing the right one and applying, making expansion or renovation easier.

Understanding Repayment Terms for Commercial Mortgage Loans

Common Interest and Repayment Terms

When it comes to commercial mortgage loans, the interest rates and repayment terms can vary quite a bit from lender to lender. But there are some common threads you’ll see across the board.

For starters, most commercial mortgages have a repayment term of 5-20 years. The specific term will depend on factors like the loan amount, the property type, and the borrower’s creditworthiness.

As for interest rates, they’re typically higher than what you’d see with a residential mortgage. Why? Because commercial loans are considered higher risk. But the exact rate will depend on things like the loan-to-value ratio and the debt-service coverage ratio (more on those in a bit).

Another thing to keep in mind: many commercial mortgages come with a balloon payment at the end of the term. This means you’ll need to pay off the remaining balance in one lump sum. So it’s important to have a plan in place for how you’ll handle that when the time comes.

Loan-to-Value Ratios and Debt-Service Coverage Ratio

Two key factors that lenders look at when determining the terms of a commercial mortgage are the loan-to-value (LTV) ratio and the debt-service coverage ratio (DSCR).

The LTV ratio compares the loan amount to the value of the property. Most lenders want to see an LTV of 75-80% or lower. So if you’re buying a $1 million property, you’d need to put down at least $200,000-$250,000.

The DSCR, on the other hand, measures the property’s annual net operating income (NOI) against its annual debt payments. Lenders typically want to see a DSCR of 1.25 or higher. This means the property’s NOI should be at least 25% higher than the annual debt payments.

So why do these ratios matter? They give lenders a hand in figuring out how risky the loan might be. A lower LTV and higher DSCR mean there’s more cushion in case things don’t go as planned. And that can translate to better terms for the borrower.

Exploring Alternatives to Commercial Mortgage Loans

Potential Financing Amount

While commercial mortgages are a popular choice for financing commercial real estate, they’re not the only option. The amount you can borrow will depend on the alternative financing route you choose.

For example, with a SBA 504 loan, you can finance up to 90% of the project cost. This includes the purchase price, renovation costs, and even some soft costs like architectural fees.

Another option is a commercial bridge loan. These short-term loans can provide financing for up to 80% of the property’s value. They’re often used to “bridge the gap” while waiting for long-term financing to come through.

MWBE Assistance

If you’re a minority- or woman-owned business enterprise (MWBE), there may be special financing programs available to you. These programs aim to level the playing field and provide access to capital for underserved communities.

One example is the Minority Business Development Agency (MBDA), which offers grants and loans to MWBEs. They also provide technical assistance and business development services.

Another resource is the National Association of Women Business Owners (NAWBO). They’ve got a range of financial help and tools on deck, designed with women entrepreneurs in mind.

Special Financing Options

In addition to MWBE assistance, there are other special financing options that may be available depending on your situation. For example, if you’re a veteran, you may qualify for a SBA Veterans Advantage loan.

Or if you’re looking to finance a property in a rural area, you may be eligible for a USDA Business & Industry loan. These loans offer competitive rates and terms for qualified borrowers.

Digging in and checking out all your options is the way to go. Don’t assume a traditional commercial mortgage is your only choice. With a little digging, you may find a financing solution that’s a perfect fit for your unique needs.

Commercial vs. Residential Real Estate Loans

Key Differences Between Commercial and Residential Loans

While commercial and residential real estate loans both involve borrowing money to purchase property, there are some key differences between the two.

For one, commercial loans are typically used to finance income-generating properties like office buildings, retail spaces, and apartment complexes. Residential loans, on the other hand, are used to finance properties that the borrower intends to live in themselves.

Another difference is the loan terms. Commercial loans often have shorter repayment periods (5-20 years) and higher interest rates than residential loans (15-30 year terms with lower rates). This is because commercial properties are considered higher risk.

The underwriting process is also more complex for commercial loans. Lenders will closely scrutinize the property’s financials, including the rent roll, operating expenses, and cash flow. They’ll also look at the borrower’s experience and credit history.

Impact of Credit Score on Loan Acquisition

When you’re aiming to get any kind of loan for real estate, your credit score steps into the spotlight, but it really takes center stage if you’re diving into the commercial side. Because these loans are higher risk, lenders are looking for borrowers with strong credit histories.

Most commercial lenders want to see a credit score of at least 680, but preferably higher. A score in the 700s or 800s will give you the best chance of qualifying for favorable loan terms.

If your credit score is on the lower end, don’t worry. There are steps you can take to improve it, like paying down debt and disputing any errors on your credit report. You may also be able to qualify for a loan with a lower credit score if you have a strong business track record and plenty of collateral.

The bottom line? While your credit score is important, it’s just one piece of the puzzle. Lenders will look at the full picture when considering your loan application. So focus on presenting the strongest case possible, and don’t let a less-than-perfect credit score hold you back from pursuing your commercial real estate dreams.

 
Key Takeaway: Understanding commercial mortgage loans means looking at interest rates, repayment terms, and balloon payments. Lenders weigh your creditworthiness against factors like the loan-to-value ratio and debt-service coverage ratio to decide on your loan terms. But don’t just settle for traditional options; explore SBA 504 loans, bridge loans, or special programs for MWBEs and veterans. Remember, commercial mortgages differ from residential ones in risk level, repayment period length, and underwriting complexity.

FAQs in Relation to Mortgages for Businesses

What is a business mortgage?

A business mortgage is a loan secured by commercial property, which aids businesses in purchasing or developing real estate.

Can you take out a mortgage to start a business?

Yes, it is possible, but it can be challenging. Typically, personal assets are used as collateral rather than the business itself.

Is it hard to get a mortgage if you own a business?

Owning a business can make the process more complex. Lenders will closely scrutinize your income stability and the financial health of the company.

What is the difference between a commercial loan and a business loan?

A commercial loan is specifically designed to finance real estate for businesses, whereas a business loan can be used for any purpose within the company.

Conclusion

Every step towards understanding and acquiring mortgages for businesses brings us closer not just to brick-and-mortar establishments but also solidifies our standing in the competitive world known as commercial real estate. 

This journey isn’t about sprinting past hurdles; it’s more akin to a marathon where persistence, informed decisions, and strategic planning win the race.

The truth is simpler than fiction – while getting a mortgage might seem daunting at first glance, equipped with the right knowledge and resources makes this process less like navigating an obstacle course and more like charting a clear path towards success.

Mortgages open doors – literally – leading not only to new spaces but new opportunities too. And who knows? Perhaps that empty lot today could be tomorrow’s hottest new venue because of smart financing choices made by visionary entrepreneurs like yourself.

Take the first step towards transforming your real estate dreams into reality with eFunder. Click here to schedule a personalized consultation and discover how we can help you secure the optimal financing for your next investment venture. Let’s build your success story together!

Additionally, don’t miss out on our exclusive offer – a 30-day free trial from Realeflow, specifically tailored for ambitious investors like you. Click here to seize this opportunity and elevate your investment strategies.

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Picture of Terence Young
Terence Young

Founder of eFunder

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