What Owners Should Consider When Applying for a Business Loan
As your business grows, you may find that your current location is too small for your needs. Some owners consider purchasing vacant property and developing a building to suit their needs. Others consider expanding an existing building to better meet the needs of the business. No matter how you choose to expand into the real estate market, understanding the requirements for a real estate business loan is critical. Here are some things to take into consideration as you grow your business.
What Is Required for Real Estate Loans?
When applying for a commercial real estate loan, the lender will investigate the credit history of the business. They will also look into the credit history of all major investors in the business. Evaluating the credit risk of both allows the lender to make an educated decision on the terms and rates of the loan they will offer.
Lenders also require a strong business plan detailing how the property will benefit your business and increase your profits. Provide your lender with a strategic analysis of your business and competitive environment. You will also need to provide a cash flow statement, balance sheet and income statement.
With most loans, the collateral is the property that you are purchasing. In the event your business defaults on the loan, the bank can sell the property to recover its investment. Many lenders will require an appraisal to ensure that the purchase price is equivalent to the value of the property.
How do Real Estate Loans Work?
Commercial real estate loans function differently from other loans. When a business applies for a real estate loan, they are applying for an amortized loan with a short repayment schedule. The typical length of this loan is 10 years. You will be paying a smaller monthly payment for the majority of the loan. The final payment is a balloon payment, where you pay off the remainder of the loan amount. Amortization schedules can be negotiated with the lender if your business has excellent credit.
Be prepared to provide at least 25% in cash toward the down payment on the loan. Lenders will want to see that you are prepared to invest your business’ assets into the property.
Investing in commercial real estate is a great way to expand your business plan and increase your company’s revenue. Providing the information that the bank requires and understanding some basic terms of real estate loans helps you navigate the financial aspect of the deal.