With so many commercial loan options available, it can be difficult to know which is best suited to your particular needs. On the other hand, not obtaining the right funds will result in you not reaching your full business potential.
To make the process easier, we’ll take a look at some of the most common types of commercial real estate loans and explore their advantages and disadvantages. Whether you’re looking to buy, expand, or scale a business, understanding these loan options will help you make an informed decision that’s tailored to your specific goals.
Table of Contents
Key Points
- Commercial loans and commercial mortgages differ in collateral and usage; the former is often unsecured and versatile, while the latter is secured against property and is specialised for real estate acquisition or refinancing.
- Commercial construction loans offer flexible repayment plans and interest rates between 4% to 12%, making them ideal for large-scale building projects.
- Conventional bank loans offer better interest rates and longer repayment terms but come with stringent approval criteria and usage stipulations.
- SBA 504 loans are a long-term financing option for small businesses, offering lower down payments and attractive rates for purchasing fixed assets like buildings and equipment.
- Hard money loans provide fast funding secured by real estate, but carry higher annual interest rates, making them only suitable for short-term real estate investments.
Why You Might Need a Commercial Loan
If you need to make a change and expand, but your funds simply don’t allow you to do so at this current point in time, you will likely discover the commercial loan option. This loan is perfect for businesses that believe the expansion will bring them many benefits and return on investment.
Besides that, this type of loan can be used to procure necessary equipment, redesign your office’s interior, purchase a commercial property, and so much more. But there are different types of commercial loans, and each type helps small businesses reach their full potential.
How Commercial Loans Differ from Commercial Mortgages
While both commercial real estate loans and commercial mortgages provide businesses with essential funding, they differ mainly in their collateral requirements and usage. A commercial loan is a versatile funding option, often unsecured, that can be used for various operational needs such as working capital or inventory purchase.
In contrast, a commercial mortgage is a secured loan specifically aimed at acquiring or refinancing commercial real estate, using the property itself as collateral. This distinction makes a commercial mortgage more specialised but often comes with the benefit of potentially lower interest rates and longer repayment terms.
Different Types of Commercial Real Estate Loans
Commercial Construction Loan
These types of loans can be an ideal way to finance large-scale building projects. With solid terms and repayment plans that offer flexibility, you can use this loan to unlock the potential for previously thought impossible expansion. The interest rates of commercial construction loans are determined by the lender and the project you present before them. Still, you should expect to be greeted with an interest rate of anywhere between 4% to 12%.
Don’t let yourself put off projects; obtain commercial construction loans and work on achieving your business goals.
Conventional Bank Loans
When you think about getting a loan, the first thing that comes to mind is the conventional bank. After all, banks have been loaning money to individuals and businesses alike for almost the start of modern banking.
And while they offer a more traditional approach with stringent approval criteria, their loans also generally come with better interest rates and longer repayment terms than other types of lenders. However, it’s very unappealing to receive funds that you can’t spend the way you want to and improve your business. All bank loans will come with some sort of stipulation that you must adhere to, which is one of the main reasons why most businesses will look for private loans.
However, when it comes to funding large projects that require long-term investments or dealing with heavily regulated industries that necessitate higher levels of security and careful management, there’s arguably no better option out there than taking out a conventional loan from your local bank.
SBA 504 Loan
The Small Business Administration 504 loan is a great way for small business owners to finance their operations in a cost-effective manner. This long-term financing option allows businesses to purchase fixed assets essential to growth and helps improve, acquire, or construct buildings for business expansion. It can also be used for other major expenses like machines, vehicles, and equipment.
The loan provides lower down payments than most commercial real estate loans and features attractive rates and terms that add flexibility and support sustainable growth within the business community. With the help of an SBA 504 loan, businesses can have access to the essential resources they need while they keep their cash flow working.
Hard Loans
A hard money loan is a type of loan that is often used in real estate transactions. This type of loan allows an individual to borrow funds secured by real estate property at an incredibly fast rate. Usually, hard money loans are funded within a matter of days, unlike traditional mortgage loans, which can take up to months before everything can be finalized. These loans appeal to investors and entrepreneurs who need access to capital and want it quickly.
Annual interest rates are typically higher than a conventional mortgage loan, reflecting the higher risk associated with these types of loans. However, they can be great sources of temporary funding for those looking to finance their investments or other projects in a short amount of time.
Bottom Line
To fuel your small business’ success, you need to access the right financing. By procuring a loan tailored to meet specific needs and goals, you can secure much-needed funds to help propel consistent growth in pursuit of great heights. So, explore the different types of commercial real estate loans and find the one that best suits your needs.