There are no doubt many moving parts to operating a business, and securing a commercial property may be a necessary part of the equation. You have a number of options to choose from when it comes to the type of loan you will obtain, and, the choice you make will depend largely on your circumstances. It pays to do your research, and below, we’ll be discussing 5 tips when preparing to finance a commercial property.
Make A Large Down Payment
You may be tempted to go small when it comes to putting up money upfront because you wish to retain more cash flow in your business. Nevertheless, you want to resist this tendency and put as much money as is possible toward your investment.
This is because the amount you put up on the commercial property affects the loan to value ratio or LTV. The LTV is a major factor banks consider when determining the interest rate you will pay. A smaller LTV means you’ll pay a smaller percentage, and a larger LTV will result in a greater amount in interest. Over the course of years, this translates to a significant amount of capital being diverted to pay off the interest accrued. For this reason, you’ll want to keep the original principle to a minimum.
Count The Cost
When you take out a commercial real estate loan, the property you are financing will also act as the collateral. This means that if you default on the payments, the building can be rescinded. For this reason, lenders will want to assess the value of the buildings they will provide backing for, as your term will generally be ‘asset-based’.
Unless you act quickly, most properties will be sold to pay back what was lost, and you will be unable to reclaim it. Careful planning is needed to prevent this from happening, analyzing your income streams and business model to ensure sustainability.
Do Your Homework
The preparation period is when you need to decide the type of loan that you want. You can opt for a traditional commercial real estate loan, and for this, you will need a stellar credit rating, as these carry the lower APRs.
You can approach the Small Business Administration’s and choose between their 7(a) and 504/CDC programs. These typically carry a good rate but can have terms as long as 25 years, and their APRs start at 5% and 7-10% respectively. A hard money loan comes from a private investor or lender and has higher usury attached but generally fewer qualifications. You can also apply for a bridge loan, and these have shorter terms and must be paid back quickly.
Consider The Time Limit
We touched on the length of terms briefly, but it’s key that you look over your financial picture to see what will best work for you. In general terms, you will secure more affordable loans the longer the repayment schedule.
An agreement that is drawn out for decades will cost you less every month, but you will need to calculate the amount of interest these extra years will tack on. What is less affordable in the short term may prove better in the long run.
Do not go with a single opinion when your very business relies on accurate information. It is vital that you speak to a variety of lenders to see what they offer you. It is highly probable you will hear different opinions and that some investors will be more stringent than others.
There also exist brokers who can facilitate this process for you. This stage of preparation is key to ensuring you get the best possible deal, and for this reason, you’ll want to take your time and gather information from various players in the industry.
Fidelman & Co. specializes in management consulting, presentation advisory, and financial modeling. We focus on building businesses alongside entrepreneurs and investors. Contact us today for more information about what we can do for you.