When considering investing in commercial property, there are a few different types of financing options that should be considered.
SBA loans are available for entrepreneurs. The SBA 504 loan is available for the purchase of existing buildings, land, land improvements, long term machinery, the construction of new facilities, renovations of existing building, equipment and refinancing debt after the expansion of a business’ new or renovated facilities. The BSA 504 loan provides 90 percent financing. The SBA generally provides 40 percent of the financing, another participating lender providing 50 percent and the borrower providing 10 percent. The maximum SBA loan amount is $5 million.
Another popular SBA loan is the SBA 7 (a) loan. Borrowers can explore the 7 (a) loan for the same purposes as the 504, and also receive financing for up to $5 million. The 7 (a) loan offers more flexibility and longer terms. One main difference from the 504, is that the borrower’s business must be considered small for its industry. There are also special programs for borrowers looking to export, members of the military, for individuals who are in an underserved community and small business owners who need to meet short-term capital needs. In addition, the company must operate for profit and have reasonable equity to invest.
A traditional mortgage is also an option for commercial property financing, with the conventional loan being the most common. Most investors put-down 20 percent of the purchase in exchange for a lien on the property, with a mortgage. Conventional loans generally have lower interest rates but have long terms, therefore, are not the best for short-term financing. Buyers need a good credit score to qualify and the property generally is put in the owner’s name, instead of an LLC.
The Commercial Bridge Loan is very specific in its terms. This type of loan should be used as a short-term strategy, with the borrower having the intention of refinancing or selling within a couple of years. This type of loan is ideal for renovations or properties that need upgrades. Borrowers should consider this type of loan if waiting for permanent financing is not an option or if credit needs improvement.
If a borrower cannot get lending from a bank or credit union for short term financing, a Commercial Hard Money Loan should be considered. For this loan, the borrower offers tangible assets, such as property, that is used as collateral. This type of loan generally comes with higher interest rates but borrowers will not face the same type of regulations and limitations found at a bank.
Industrial Revenue Bonds (IRBs) are available for companies who specialize in water treatment, manufacturing, waste disposal or waste recovery. These bonds are issued by a government entity, to for-profit businesses that cannot get financing from a bank or a credit union. The proceeds of the bond are used to fund the borrower’s project. In order to qualify for an IRB, the company’s capital expenditure in the three years prior and three years subsequent of the bond, cannot exceed $20 million.
Seller financing is an additional option for borrowers to seek out. Seller financing benefits both parties; sellers can appeal to more buyers and buyers can potentially get access to more capital. Buyers will often have to put down 20 to 30 percent as a down payment. Buyers might find that seller financing comes with a higher sales price, but these deals can close quickly and buyers can get better rates on financing.