As a new business who is hoping to expand, you will inevitably need to purchase commercial property at some stage. Whether you run a coffee shop, retail outlet, garage or factory, there comes the point when it’s time to branch out and invest in your business’s future.
However, many small businesses come across stumbling blocks when they go to purchase property. Not only do they struggle to come up with the cash advance required for a deposit, but they also must acquire funding to cover the rest. The commercial loan application process can be tough to navigate, so let’s break it down so you can better understand your options.
Why does your business need commercial real estate?
Before you start looking at commercial loans, you must assess whether real estate is a justifiable expense for your business. Many small businesses reach a point where they need more space to grow. Others realize that purchasing commercial real estate will help them expand the service they offer. Both are perfectly justifiable reasons for acquiring property for your business.
Some startups, on the other hand, assume that they need office space or a physical premise to launch, and that isn’t always the case. Alternatives include renting space or starting your business from home to keep your costs down for the first few months.
When you need to purchase commercial real estate, you will know. A time will come where you require more storage for your inventory, or you’re looking for an accessible storefront to connect with your customers. You will realize that it is impossible to scale your business without space and a platform to grow. When this time arrives, you will need to assess your funding options to find the right solution for your business.
Funding for commercial real estate
When you’re buying commercial real estate, it’s helpful to know the financing options available to you. There are plenty of funding options to help you purchase business real estate, including:
- Commercial real estate mortgage loans: A traditional mortgage loan, repayable in 15-25 years.
- Working capital loans: Short-term loans that usually need to be paid back in 5 years or less.
- Leasehold improvement loans: These are short-term loans that span about 5 years. They can be used to cover the improvement or renovation of a leased space, but not to purchase real estate. You can also apply for equipment financing to pay for any new machinery required for your new premises.
- Vendor financing: You can source vendor financing from property owners who are keen to make sure their sale goes through.
However, one of the most popular lending streams for businesses looking to buy real estate is the guaranteed loan provided by the Small Business Administration (SBA). This loan is taken out by thousands of companies in the U.S. every year.
The SBA typically cover loans of up to $2 million for loan repayment terms of up to 25 years by providing a guarantee to lenders to minimize the risks.
An SBA 7(a) loan is a great option if your business does not have the cashflow history to be a strong candidate for a bank loan. In this case, the guarantee would serve to protect the lender against default.
How does an SBA 7(a) loan work?
The SBA arranges loans for small businesses who need real estate, equipment or working capital. The SBA does not actually provide the loan. Instead, it guarantees a portion of the loan amount (in this case around 75%) to minimize the risks for the lender.
Interest rates for business loans vary between lenders. The amount of interest you pay will depend on the prime rate, the maturity of the loan and the amount you borrow.
Are you eligible for a commercial real estate loan?
All commercial loans have different eligibility requirements. In general, however, you are most likely to be approved for a loan if you can meet the following basic criteria:
- Your business has a strong history of profit and a stable cashflow
- You can provide a healthy balance sheet and cashflow forecasts for the next 3-5 years
- You have a personal credit score of above 700
- You have a strong business plan and management experience
- You have borrowed before and met your repayments
SBA 7(a) loan requirements
- 7(a) loans from the SBA tend to have more specific requirements. The qualifications for an SBA 7(a) loan are as follows:
- You must be defined as a “small business,” i.e., your net worth must not exceed $5 million.
- Your business must be registered in the United States.
- You must be operating for profit.
- You must not have any existing debt obligations.
- Loans must be used for SBA approved purposes, such as acquiring land or real estate, or buying machinery or supplies.
- You must provide all relevant documentation, including a personal financial statement, cashflow projections, and financial statements.
How to apply for a small business loan
To apply for an SBA 7(a) loan, you must find an SBA-approved lender and complete an application. You can do this online using the SBA website. Your lender will then help you work through the paperwork required by the SBA.
Each commercial loan application is unique, so there is no set process for acquiring a loan. 7(a) loan applications often take weeks or months to process. If you’re looking for an immediate cash advance, you may wish to investigate short-term loans or SBA Express loans, which can be paid out within days.
The time comes for every small business to expand, and buying commercial real estate is an important step on the ladder to success. Like any business decision, however, finding a loan to finance this move should be considered carefully. In order to get business loans that are right for your business, you will need to take time to explore which funding options might be fit for your project, and how to apply.