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Commercial Financing Explained by a Commercial Real Estate Brokerage Firm

With the incredibly low-interest rates on property loans our commercial real estate brokerage firm has been seeing lately, it’s no wonder that investors are scooping up properties all over Brentwood and Franklin, TN. But while commercial real estate might be an excellent investment in someone’s portfolio, there are a lot of things that can go wrong if you don’t know what to look for in terms of financing.

Hinge Development & Realty offers a wide range of financial services for real estate investors, including real estate financial management, so we’ve seen the common pitfalls that new investors often fall into when seeking a commercial loan. This article will outline some of the key things to keep in mind while weighing your financing options. Before you begin your search, start by asking yourself the following three questions.

What Type of Commercial Loan Do You Need?

You have multiple options to choose from when considering a loan for a commercial property. As any real estate financial management professional will attest, there’s no such thing as a one-size-fits-all option that will work for every borrower.

Your financing needs (and options) will vary depending on things like your credit history, current financial situation, and business size, as well as how you want to pay the loan back. Below are some of the most common commercial loan options – it’s a good idea to take a look at each, and consider their pros and cons carefully before choosing a commercial lender.

And remember, it’s always a wise choice to seek advice before making a decision that will have such a large impact on your business – consult other members of your internal team as well as the financial property management team you work with.

Types of Commercial loans

Traditional Bank Loan

Traditional bank loans are just what they sound like – a commercial mortgage loan given to you by a bank. This commercial loan is similar to a residential mortgage loan.

Traditional Bank Loan Pros:

  • Potential for a better deal if you go through your bank
  • Competitive interest rates
  • Longer loan terms available

Traditional Bank Loan Cons:

  • Requires a strong credit history
  • Often requires a higher down payment
  • Slower turnaround time than other options

SBA Loan

The United States Small Business Administration (SBA) offers a program that facilitates commercial real estate loans. Commercial real estate investors have a couple of SBA Loans to choose from, both with excellent advantages.

SBA Loan Pros:

  • Low interest rates
  • 25 year terms
  • Lenient eligibility requirements
  • Large and small loan amounts

SBA Loan Cons:

  • Slower turnaround time than other options
  • Sometimes require collateral
  • You must be able to qualify as a small business

Blanket Loan

If you plan on adding multiple commercial properties to your real estate investment portfolio at once, you might consider a blanket loan. This type of mortgage applies to more than one property, saving you from having to juggle multiple loans and payments.

Blanket Loan Pros:

  • Lower closing costs
  • More negotiating power
  • Simplified financial management

Blanket Loan Cons:

  • Shorter terms
  • One underperforming property can jeopardize the others

Hard Money Loan

Hard money loans are made by private lenders rather than traditional financial institutions – these lenders usually care more about the property’s value than the borrower’s credit score. Hard money loans are a good option if you need money quickly while you’re finalizing longer-term options.

Hard Money Loan Pros:

  • Fast turnaround times
  • Easy to qualify for

Hard Money Loan Cons:

  • High interest rates
  • Short loan terms

What Does a Commercial Lender Need From Me to Get Approved?

There are several differences between residential and commercial real estate and seeking a lender for a commercial real estate loan can be considerably more work than doing so for a residential property. This makes sense when you consider the larger price points on commercial real estate, as well as the uncertainty that comes from relying on your business to do well enough to pay the loans back. 

Commercial loans usually have a longer turnaround time than residential ones, and lenders will generally ask for a more detailed financial package. If the idea of preparing a financial package on your own seems intimidating, some commercial real estate brokerage firms have real estate financial professionals on their team who can do it for you.

Each lender will have different specific requirements, but in general, they’re trying to verify that you and your business partners are reliable, and that your business has a good chance of making enough money to repay anything you borrow. At minimum you can usually expect to give a lender:

  • Business financial reports
    • income statement
    • balance sheet
    • cash flow statement
  • Your credit report
  • Recent bank statements
  • Tax returns
  • Personal financial reports
  • Your business plan
  • Proof of collateral
  • Loan use documentation

What Do I Need From a Commercial Lender?

When you’re feeling the pressure to hurry up and close on a property, it can be easy to forget that vetting a company for a loan is a two-way street. But taking the time you need to evaluate a lender before you sign any paperwork can save you stress (and money) in the long run. When seeking financing for a commercial real estate investment, consider the following to help you decide on a lender:

What do I need from a commercial lender?
  • Reputation: How long has the company been around, and what are its clients saying?
  • Location: If you choose a national lender, make sure there is a local office to increase accessibility should you need to speak with someone. 
  • Market familiarity: Does the lender have experience with companies like yours? Does the team understand how your market works?
  • Size: Do you want the assurance of a larger corporate lender or the one-on-one nature of a smaller financier?
  • Qualification requirements: Some lenders have stricter requirements than others – you may have to take this into account if your business is just starting out or your credit isn’t great.
  • Repayment terms and interest rates: Lenders’ repayment terms and interest rates can vary widely depending on the type of loan you get and your financial situation; make sure you read and understand all loan terms and choose the one that works best for you before signing.
  • Prepayment penalties: Be aware of the small print – many commercial lenders tack on prepayment penalties if you pay a loan off early.
  • Turnaround times: Some loans take longer than others to go through, so if you’re in a rush you’ll need to take that into consideration.

Interested in Financing a Commercial Building? Put Our Financial Management Services to Work.

Are you making your first venture into commercial property investing and looking for a skilled financial property management team to show you the ropes and make sure everything’s in order? Or are you an experienced property investor who simply wants to outsource your real estate financial management needs?

Either way, we can help!
Hinge Development & Realty is a full-service commercial real estate brokerage firm serving clients in Brentwood and Franklin, TN. Our real estate and financial experts offer fully customizable services to suit your exact real estate investment needs – contact us today.

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