Starting and operating a business can be expensive. There is the cost of advertising, buying supplies/equipment and hiring employees. However, running a business from a home office can decrease business expenses and improve cash flow. But if your home cannot accommodate a business, or if you believe that it’s time to expand to an independent office space, commercial mortgages can help achieve this goal.
Commercial mortgages are a type of business loan that uses commercial property as collateral. These loans can provide funding to purchase land for business use, office space, warehouses, restaurants and any other commercial property.
Because commercial loans require collateral and lenders have legal claim to the property, these types of loans are easier to obtain that other types of business loans. Plus, commercial mortgage rates feature lower rates than business loans and signature loans, as well as flexible repayment options. Commercial loans are a cost-effective way to access capital and fund various business activities.
Commercial mortgages work like any other type of mortgage — submit an application for financing, wait for an approval and then repay the loan over 20 or 30 years. However, commercial mortgage rates are typically higher than a traditional mortgage, and a number of different factors determine whether an applicant qualifies for the loan.
When applying for a traditional home loan, lenders are only interested in the borrower’s credit and finances, but when applying for a commercial loan, lenders not only focus on an individual’s financial history, but also the financial health of his business. Don’t expect a lending institution to arbitrarily approve a commercial loan request. The property secures the loan and the bank can foreclosure and resale in the event of default, but many banks want to avoid this whole process. For this reason, it is not unusual for banks to scrutinize the credit and financial history of both the person and the company.
When assessing creditworthiness, the bank will check to see if the individual and corporation has a history of timely payments. Lateness, skipped payments, recent bankruptcies, judgments and collection accounts can negatively impact loan approvals. Plus, a close examination of assets, income and existing debts may reveal an inability to pay back a commercial loan, which also triggers a denial.
Shopping around and speaking with various lenders is the best way to secure the best commercial mortgage rates. Due to higher interest rates and higher loan amounts, the payment on a commercial mortgage can be more than anticipated. Although a commercial mortgage calculator can help predict monthly payments based on a specific amount and interest rate, a commercial mortgage broker can provide a better indicator of what to expect.
Commercial mortgage brokers function as the middleman between applicants and banks. They’ll answer an applicant’s questions, review loan applications and connect applicants with potential lenders. Although brokers charge a fee for originating the loan, they provide multiple quotes from various banks, which helps applicants get the best financing deal on their commercial loan.