Acquiring commercial real estate for the purpose of either establishing a business or expanding an existing operation is a serious challenge. Perhaps the biggest difficulty comes in acquiring financing. Here is a brief overview of what you need to know when seeking a loan for your next business property.
Real Estate Financing Advantages
Numerous reasons exist as to why using commercial property financing makes sense. Because the building itself acts as collateral, nothing else is typically required in order to secure a loan. Built-in collateral also means that your interest rate will likely be lower than you would receive via a typical bank loan. If you have bad credit, however, a personal guarantee or additional asset may be required.
Owning a piece of commercial real estate can also be helpful in terms of credit options. Once your mortgage has been paid down, you can apply for a home equity line of credit should added cash flow be necessary. Note that this option may be unavailable if your business does not also double as your primary residence.
Real Estate Financing Disadvantages
One downside to commercial real estate is that many of the financial instruments that homeowners are able to access cannot be used. Federal Housing Administration loans, for example, remain off-limits and specific lending procedures are highly constricting. Also, short-term real estate loans typically come with large balloon payments at their end. When these oversized final bills come due, the ability to pay can be highly uncertain.
Real Estate Financing Applications
Although more complicated than applying for a personal residence loan, acquiring real estate financing does not need to be cumbersome. The difference is that you need to provide a thorough business plan, as lenders will be interested in your strategy for generating income. In addition to exact details regarding how the property will be utilized, include resumes for every employee who is to work on the premises, personal and company-related tax returns, as well as a list of debts and assets. Income projections extending between three and five years should also be given.
Expect to pay additional fees for prerequisites such as having the property surveyed and appraised or executing environmental studies.
In order to thrive, small businesses must occupy a building that matches their needs. Central to the challenge of acquiring a base of operations is the task of obtaining financing. When seeking a location from which to operate, use the above guidelines to help clear this significant hurdle.