What are the Top 3 Financing Options for Commercial Real Estate?
1.5 min read.
When starting or expanding a business, obtaining commercial real estate space becomes essential in this profit-making business venture. Business owners should have a thorough understanding of the various financing options available— that is why we are sharing the three most common types below.
1. Commercial Real Estate Mortgage Loan
One of the most common financing options for purchasing commercial real estate is a commercial real estate mortgage loan. A lien on the commercial property secures this type of loan. The loan term typically ranges from 15 to 25 years, with an amortization period that often exceeds the loan term. Business owners need to be aware of the loan-to-value ratio, which represents the percentage of the property's value that the bank is willing to finance. Depending on factors such as the condition of the building and its resale potential, banks may offer financing options ranging from 75% to 100% of the commercial real estate's value.
2. Working Capital Loan
A working capital loan can be a viable option for business owners seeking short-term financial assistance to support investments in growth. These loans are typically amortized over a period of about 5 years. By securing a working capital loan, businesses can ensure sufficient cash flow to prevent sudden shortages when relocating to a larger space or undergoing renovations.
3. Leasehold Improvement Loan
Business owners should consider the leasehold improvement loan as financing when planning renovations for leased space. This type of loan is typically short-term and amortized over a five year period. Banks may accept the improvements made to the leased space as collateral, resulting in a lower interest rate for the loan.
Regardless of the financing option chosen, commercial real estate agents must advise their clients to maintain a good credit score and possess a solid and profitable business history. These factors greatly enhance the chances of obtaining loan approval for their business endeavours.
References
Folger, J. (2023, June 8). Commercial real estate loan. Investopedia. https://www.investopedia.com/articles/personal-finance/100314/commercial-real-estate-loans.asp
Top financing options for commercial real estate. BDC.ca. (2023, February 6). https://www.bdc.ca/en/articles-tools/money-finance/buy-lease-commercial-real-estate/top-financing-options-for-commercial-real-estate
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