There are many types of real estate financing available to commercial business owners. The type of financing you choose will depend on the property you are purchasing, your business goals, and your financial situation. Keep reading to learn about the different types of financing options for commercial real estate.
Real Estate Financing Options
Commercial real estate financing is the umbrella term for the various ways business owners can borrow money to purchase or improve commercial properties. The most common types of commercial real estate financing are mortgages, lines of credit, term loans, and leases. A mortgage is a loan used to purchase property. The property is used as collateral for the loan, which means the lender can seize it if the borrower fails to repay the debt. A line of credit is a loan that allows business owners to borrow against their account’s limit as needed. This type of financing is ideal for businesses that need flexibility with their borrowing, as they can only borrow what they need and don’t have to take out an entire loan all at once. A term loan is a lump sum of cash borrowed by an owner that must be repaid over a set period of time, typically five to seven years. This type of financing is ideal for businesses that need a large amount of money upfront and have a plan for how they will use it. A lease is an agreement in which one party (the lessor) agrees to give another party (the lessee) temporary use of an asset in exchange for rent payments. Commercial leases are typically for office space, retail locations, or industrial properties.
The Most Common Method
The most common way to finance commercial real estate purchases is through mortgages. Mortgages are loans secured by property. In other words, if the borrower cannot repay the debt, the lender has legal rights to take possession of and sell the underlying property. Mortgages are available from many different sources, including banks, credit unions, and online lenders. There are a few different types that are used to finance commercial real estate. The most common are the fixed rate and the adjustable rate. With a fixed-rate option, the interest rate stays the same for the entire length of the loan. This can be helpful for businesses that want to know exactly what their monthly payments will be for the duration of the loan. With an adjustable-rate option, the interest rate can change over time. This can be helpful for businesses that anticipate that their monthly payments will decrease over time. However, it can also be risky if interest rates rise significantly.
Obtaining Bridge Loans
A bridge loan is a short-term loan used to finance the purchase of commercial real estate. The loan is typically for a period of six to 12 months, and the interest rate is higher than on a traditional mortgage. Bridge loans are used when the buyer does not have enough cash available to close on the property purchase. The loan is then repaid when the purchaser secures permanent financing.
Accounts Receivable Financing
Accounts receivable financing is a type of real estate financing in which the business obtains cash by selling its accounts receivable (invoices) to a third party. The third party then becomes the creditor of the business and is entitled to payment for the invoices it purchased from the business. This type of financing can be used by businesses that have difficulty obtaining traditional loans from banks or other lending institutions. Accounts receivable financing is usually less expensive than traditional loans, and approval is typically easier to obtain.
No matter what type of commercial real estate financing you choose, it’s important to understand the terms and conditions involved before signing any contracts. Make sure you’re comfortable with the interest rate, repayment schedule, and any other associated costs. If you’re not sure what questions to ask or where to start, consult with an experienced commercial real estate agent or lender for advice.