In the world of financing, there are some ultra-flexible loan options. Serving much like Swiss Army knives, they can be used for everything from paying invoices to hiring staff to adding another vehicle to your fleet. Loans on this list include SBA 7(a) Loans, short term loans, business credit cards, and business lines of credit.
On the other hand, some targeted options help provide financing for specific uses. For example, if you seek an equipment loan, you’re not going to use it to hire additional staff. And you’re not going to use a startup loan to pay for the opening of your 5th location. These loans are tailored for certain purposes and they have usage limitations. If you’re ever unsure of what they’re for, just say their names out loud 3 times and it should become more apparent.
Commercial real estate loans (also called commercial mortgages) fall into this specific-use camp. If you need to do something dealing with real estate, this product is for you. Whether you’re just getting started or are an established business looking to expand, a commercial real estate loan lets you leverage the equity in your property to get the money you need for an office, retail space, restaurant, or warehouse.
Many entrepreneurs use commercial real estate loans to get out of leases so they can launch the next stage of property ownership. You can also use this kind of financing to buy a building, construct a new facility, expand or update an older property, or to refinance either for an extension of your payment term or to get a more favorable interest rate.
With a commercial real estate loan, you can plan on interest rates starting as low as 4.25%. That’s right, this kind of financing can have rates lower than an auto loan. Despite the low interest rates, the amounts start around $250,000 and can go all the way up to $5,000,000. As for the terms, they commonly range from 20-25 years.
While some loans require lots of hoop-jumping in the application process, it’s a fairly straightforward process to apply for a commercial real estate loan. A lender will start by checking into your credit history. They’ll also evaluate the property you’d like to use as collateral, ensuring the value is up to snuff. You’ll almost always be required to submit a plan for how you’ll use the loan. Take the time to make it airtight, because the strength of your strategy will go a long way in getting your request approved.
Finally, make sure you have the rest of your ducks in a row before you click submit on an online application. For example, lenders will want to review property-related documents such as the purchase contract, property blueprints, property market analysis, scope of work, project budget, and an assessment of the property’s existing condition.
Be aware that different lenders can use different disclosure standards, pricing metrics, and calculations. This inconsistency can be frustrating because it makes it difficult to accurately compare your options.
“Real estate is extremely fragmented…no one owner is dominating the commercial real estate market (compare to Google Chrome’s 67% ownership of the browser market!),” says Forbes.com. “This has a huge impact on the ability to efficiently process transactions. In the next three to five years, lenders are going to either make everyone use a standardized template for underwriting deals, or use AI to create a ‘Rosetta Stone’ for translating between different financial models.”
One such Rosetta Stone that is already available is SMART Box™ (Straightforward Metrics Around Rate and Total cost), an evaluation tool created by the Innovative Lending Platform Association. It promotes common language between lenders and more accessible disclosure standards. Also, it can be used to evaluate pricing metrics.
“Access to capital is a top priority for NSBA and we appreciate how SMART Box allows small businesses to more fully assess and compare lending options,” says Todd McCracken, president and CEO of the National Small Business Association. “This type of price transparency, along with best practices like the ones adopted by the Coalition for Responsible Business Finance (CRBF), will help solidify the trust between non-bank lenders and small businesses.”
Currently, SMART Box™ offers versions customized for term loans, lines of credit, and merchant cash advances. In the future, it’s possible that there could be a version designed specifically for real estate.
The majority of small business loan requests are rejected, so you should approach the process with an open mind and remember that getting denied isn’t the end of the world. Rather, it’s a rite of passage many entrepreneurs have experienced multiple times.
So what determines your success? Once a lender has received your application, they’ll use several factors to make their decision. If your request is approved, these same factors will also be used to determine what terms and rates you qualify for.
In addition to the aforementioned considerations, such as your business plan and the value of your collateral, lenders will use these 6 factors to make their decision:
It might be beneficial to speak with an expert before beginning the process. They can help you evaluate your financial situation and prepare a business plan that will get noticed by lenders. Additionally, they can guide you in assembling the correct documents before applying.
The most important thing to remember is to keep your mind open and always take the time to analyze your options. That’s the beauty of a lending marketplace—you get access to diverse options that a traditional bank can’t offer. Also, you’re improving your odds of success because 70% of marketplace applications are approved, compared to only about 50% for bank loans.