Even with the rise of the internet and remote working, the majority of businesses in the world still operate through a storefront. Many of these businesses may be starting out or are looking to expand on their current operations.
If you’re looking to open up a store or are wanting to grow, chances are you are quite familiar with a commercial mortgage, also known as a commercial real estate loan.
Below, we’ll go over the basics of a commercial mortgage and help you decide if that’s a step you need to take for your business.
What’s a commercial mortgage anyway?
To start off, let’s review what a commercial mortgage is. The word “mortgage” is something you have probably heard about since you were a child, as a go-to adult joke was always tied into someone paying off their mortgage for them.
The idea of a commercial mortgage is the same as a home mortgage. You borrow some money for a piece of property then make monthly payments over the course of years until you are in the clear. Not paying back this mortgage means you will eventually default on your loan and the bank or whomever can come and seize your property.
The nitty-gritty, however, is quite different.
How a Commercial Mortgage Works
Just as mentioned above, you’re going to be borrowing money from an institution (more on that later) for some kind of property.
This kind of property is always tied to your business and it can be buying a storefront area or adding onto your business physically. You cannot use this money to purchase new office computers or get new furniture, that’s more like a small business loan.
Pretty basic so far, right? Let’s get into the nitty-gritty now.
The majority of home mortgages are over a 30 year period whereas commercial mortgages are in between 5-20 years. Even with some stretching out to 20 years, those are the least common as most commercial mortgages last between 5-7 years.
Money down is also a big difference. Whereas some home mortgages will let you put down 20% or less even, the majority of commercial mortgages require 30% to start. You’ll also have to own the majority of the building, the minimum is 51%, to be eligible for a commercial real estate loan.
In addition, banks aren’t the only option for securing a commercial mortgage. They still are far and away the most popular option but you’re not limited to your closest neighborhood bank. There are commercial lenders, who aren’t as stingy as banks are when it comes to paperwork and requirements. It is usually much quicker to go with a commercial lender as well, but their interest rates may be higher.
After these two options, there are also hard-money lenders, conduit lenders and SBA loans. These all offer their own set of positives and negatives so you’ll want to do your own research ahead of time.
What Do You Need to Do
Let’s hope that you’ve been diligent about keeping track of all your numbers and financial records over the past few years, because any lender is going to want to pour over those numbers.
It can vary with the institution, but most places will ask you for your tax returns over the last five years, business plan, personal finance information (especially for small businesses), business license and much more. If you’re not sure about bringing something, just go ahead and bring it. Banks especially can be a bit slower when it comes to approving commercial mortgages and you don’t want to lengthen that timeline by having to go collect more paperwork you should have brought in the first place.
You’ll also need to decide what kind of mortgage you will be choosing. Just like home mortgages, there are different types as mentioned above with the different types of lenders. When it comes to choosing the right type, sit down with an accountant or someone else in the business who can advise you on which route to take that would be beneficial for both your business of today and of tomorrow.
There is no blanket answer for everyone, so doing your homework is key. And lastly, remember that it may take a while to be approved so don’t be frustrated by the process and the waiting. Good things come to those who wait!