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The basics for commercial real estate loans

Buying real estate for a new company? Or are you renovating a property you already have? Both options require large sums of money - most likely through a commercial real estate loan. And these loans need more attention due to their lengthy process.

Luckily, commercial real estate loans are not another hurdle in your business plan. All you need is the right information about the loans and your business, and you will find a plan that meets your interests and the bank's terms.

Commercial real estate loans vs. Mortgage loans

The purpose of a commercial real estate loan is to fund business-related properties. Examples include office spaces, retail stores, manufacturing plants or any other companies. Then, businesses use the loans to finance a new property, develop an existing property or renovate or current business. It’s critical to note companies take out the loans, not individuals.

New entrepreneurs may confuse a commercial real estate loan for a mortgage loan, but there are crucial differences. A commercial real estate loan is similar to a mortgage loan, but the lein that secures a loan is your commercial real estate.

A lien is a right that an owner of the property gives to a creditor; it allows the creditor to seize the property if an owner cannot repay the loan. In the case of commercial real estate, the creditors want protection in case the business owner does not pay their debt. As the owner, you will need to have a lien on your commercial real estate and make a down payment on the property.

Paying off a commercial real estate loan

Once the company has a credit and a property, they have to focus on repayment. It’s similar to a repayment schedule of a mortgage loan where you develop a plan over a specific period to pay off the loan and interest.

For commercial properties, schedules are either short or long-term. A short-term repayment plan is typically three years or less, while a long-term schedule ranges from five to 20 years. You have to analyze the company’s finances to determine which plan works best for your interests.

Also, owners should consider the interest rate of their loan because commercial real estate loans tend to have higher rates than a mortgage loan. For a long-term commercial real estate loan, you end up paying significantly more than someone in a short-term loan.

You have to strongly consider all the aspects of a commercial real estate loan, from the interest rate to the lender. Before you apply, consult with a business partner or a company’s accountant to determine the best approach for your company.   

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