Thinking of investing in commercial real estate? You’ll probably need commercial real estate financing to help you make the purchase. There are many types of loans and choosing the best for your situation may require some research. Now is the best time to understand the different financing options and other basics to determine if they suit your needs. Besides helping finance the property, commercial real estate financing can also fund any construction project and keep properties fully operational and maintained.
Below is an outline of some of the commercial real estate financing options and how they work:
The United States Small Business Administration (SBA) offers two loan programs that increase the borrower’s credibility and minimizes risk for the lender as it guarantees payment of some portion of the loan. These loan programs include:
7A loans are the easiest and quickest SBA loans. It works best for small real estate projects. Your business must meet all the requirements on the SBA website to qualify for this loan. Additionally, you should provide your credit history, business income, and area of operation.
504 loans work best for big investment projects, such as land, buildings, or properties of over $1 million value. The investor must pay a down payment of 10%, SBA Certified Development Company provides 40% of the loan, and the lender gives out the remaining 50%. To be eligible for this loan, you should have an existing business, great management, and a viable business plan. Just like 7A loans, there is an eligibility criterion for this loan on the SBA website.
Most people think that a permanent loan means you’ll have to pay it back forever. No! It’s just a term that describes long-term financing that typically amortizes at around 25 years. Permanent loans come with a lower interest rate. You can take these loans for commercial real estate through a bank, life insurance company, or credit union.
Most investors run to the banks for commercial real estate loans. If you are working on a mid to large-size project and have a higher credit score, conventional bank loans are a viable financing option for you. Banks provide competitive interest rates on loans, but the only downside is that most banks require a down payment of 20% and will often charge a penalty if the payment is done earlier.
Hard money loan provides a quick commercial real estate financing option. The loans typically come with high-interest rates, and lenders appraise the loan depending on the value of the property rather than the borrower’s credit history. In most cases, investors use this type of loan to finance interim deals as they negotiate a long-term bank loan.
When investors fail to obtain bank or other traditional financing options, they can seek out seller-carried financing. This is a type of financing where the seller agrees to provide the buyer with a debt to acquire the real estate property. The buyer will then repay the seller just like they would have repaid any other loan, of course, with inclusive of interest.
Understanding the difference between the types of commercial real estate financing options is key to getting the financing you need for your business. If you’re unsure which type of financing is right for you and your situation, Murphy commercial real estate broker can help. Also, if you’re looking for the right commercial real estate broker to sell your property, we have the experience to produce the results that you expect. Contact us today and discover how the experts at Murphy Business can help you!