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Commercial Mortgage Loans Explained

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Edward D. Commercial Mortgage Loans

Taking any business to the next level requires a combination of capital and demand. Once you’ve worked to build up your brand’s reputation and create enough demand for it, the only way to generate more income is to increase supply. Although the nuances of how you do that will vary, the stumbling block many businesses run into is finance. Knowing that you’ve got a worthy product or service and knowing where you want to take it is great. However, if you can’t fund the project, expansion is tough.

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A commercial mortgage is a way to bring in some capital without giving away equity in your company. The main reason for seeking out the top business mortgage loan is to acquire a commercial property from which to run your operation. However, many of the best business loans give you a degree of flexibility, meaning the money can be used to refinance or redevelop a commercial property. In this guide, we’re going to run you through the important parts of commercial mortgages as well as commercial mortgage rates and how they differ from small business loans. The aim is to show you that borrowing cash to buy or improve a commercial property may be a smart way to expand your business.

What is a Business Mortgage Loan?

In simple terms, a business mortgage loan is money borrowed from the bank in order to purchase/redevelop a commercial property or land. As implied by the name, the property or land must be used for business purposes. In other words, you can’t apply for a commercial mortgage if the property is simply going to be for personal use (e.g. living in). This is an important point to make as those running a business need to use self-employed home loans when they want to buy non-commercial properties.

Put simply, if you want to buy a home that’s not going to be used for business, you need to show your earnings to the lender. At this point, the process of being accepted or rejected will be similar to an employed person’s application. When it comes to a business mortgage loan, the amount you can receive will be based on the financial state of your business (or your business proposal), the deposit you have and the loan-to-value ratio i.e. how much you’re borrowing vs. the property’s worth. The best way to find the right product is to use a commercial mortgage broker. These intermediaries (either a physical person or virtual service) will sift through the latest offers and find the commercial loans that suit your circumstances. The logic suggests that a commercial mortgage broker can help improve your chances of not only finding the right product but finding one you’ll be accepted for.

Why Take Out a Business Mortgage Loan?

The overarching reason for taking out a business mortgage loan is to take your venture to the next level. There are many ways you can do this and all will be dependent on the nature of your business. However, in terms of using the commercial mortgage specifically, it can be a wise idea to take one out for the following reasons:

Down Payment for Commercial Property

You may have found the ideal place to run your business. However, as a start-up or simply an idea noted down in a business plan, you might not have the money to secure it. Without a property, you don’t have somewhere to generate money for a down payment and without some capital, you can’t secure the property. It’s a vicious cycle but one that can be broken by taking out a commercial mortgage.

Commercial Property Interest Rates

Although commercial mortgage rates are higher than personal mortgages, they’re lower than traditional business loans. The beauty of a commercial mortgage is that the terms are tailored to suit the lender and the borrower. Therefore, the conditions should fit your business and the property. The average commercial mortgage in the US ranges from 10% to 20% but can be as low as 5%.

Commercial Mortgage Banking

Another benefit to commercial mortgages is that you enter into a different relationship with a bank. In other words, you’re no longer an individual customer. This can open up new products, deals and offers. What’s more, you can use commercial mortgage banking services to help reduce your tax liability through deductions based on the interest you pay on a commercial mortgage.

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How to Apply for a Commercial Mortgage

Applying for a business mortgage loan is similar to getting a personal loan. As we’ve said, using a commercial mortgage broker is a great way to do it as they’ll walk you through the process and help find the best deals. In terms of what you’ll have to do yourself, the application process will typically look like this:

  1. Complete an asset and liability form.
  2. Make the commercial mortgage application. 
  3. Provide details of your business including your business plan/bank statements for the last three months, trading figures, proof of identity/address, lease agreement.

Once you’ve done the above, the lender will assess the value of the property and your business. Legal due diligence will then be carried out and, if you’re a worthy candidate, you’ll receive a commercial property mortgage offer.

Types of Business Mortgage Loans

If you’ve decided that a commercial mortgage is for you and you’ve got all the necessary paperwork in place, the final step is to find the type of loan that suits. Commercial mortgage rates today will often vary depending on the product you choose. As we’ve said, a broker can help you choose the right loan. However, as a guide, here are the main types of commercial business mortgage loans:

7(a) SBA Loans

Although these can be tough to get, Small Business Administration 7(a) loans are guaranteed by a federal agency. This means they often offer flexible terms and low interest rates.

CDC/504 SBA Loans

Another federally backed business loan, the Certified Development Company program distributes the risk between three parties: you (10%), a commercial lender (50%) and the Certified Development Companies (40%).

Bridge Loans

This is a short-term loan that allows you to raise capital by borrowing against an existing property in order to purchase a new one.

Traditional Mortgages

These are loans based on your personal financial circumstances and typically used to buy domestic homes. However, they can also be an option for business owners if commercial mortgage rates are high or the business is new/struggling financially.

What Do Business Mortgage Lenders Look At?

When it comes to getting a business loan for commercial properties, the lender will consider the following strengths/weaknesses of your venture:

LTV Ratio

This is the correlation in value between the amount you want to borrow and the value of the property. In general, commercial mortgages allow you to borrow up to 70% of the value of the property.

Collateral & Property Information

The underwriting process on commercial property loans has to be strict as lenders see them as high-risk proposals. Because of that, the lender will want to know exactly how much collateral is in the business and the state of the property you’re seeking to buy/lease.

Credit Score

As well as checking the financial history of your business, a lender may want to know your credit score. If you’ve previously declared bankruptcy, it could affect the chances of getting a business loan.

Liquidity

You need money in the bank if you want a commercial mortgage. As well as showing you’re not a risk, lenders won’t give you the full value of a property. As we’ve said, commercial mortgage rates usually go as high as 70%. This means you’ll need to cover the remaining 30% yourself.

Commercial Real Estate Loans for Bad Credit

Commercial real estate loans with bad credit can be tough to get. The best way to improve your chances of being accepted is to clean up your company’s finances. Having said that, there are lenders that specialize in bad credit commercial mortgage loans. Using a commercial mortgage broker is the best way to find these deals.

Grow Your Business with a Commercial Mortgage

If you’re a business owner that’s looking to expand by purchasing a property or land, a commercial mortgage is ideal. By using a broker to find the best deals, you may be able to improve your chances of getting accepted and, in turn, receiving the best commercial mortgage rates.

In reality, these aren’t the only way to raise capital for your project. If you’re in agriculture, a state farm mortgage might be the best option. Similarly, a self-employed mortgage could be better if you’re planning to use the property for a mixture of business and personal use. However, a commercial mortgage will typically offer better interest rates than small business loans. What’s more, they’re designed to help businesses secure a commercial property and expand. Therefore, if you’re looking to take your venture to the next level, it’s worth using a broker to find the best commercial mortgage rates possible.