What Are My Options for Commercial Financing?

Starting your own business can be an expensive endeavor. Whether you need a loan for a building, equipment purchases or remodeling, there are many financing options available that can help you set your business up for success. You can find loan options from community banks, national banks, credit unions, life insurance companies or private lenders.

Knowing which lender to go to can make a big difference in whether you will get the loan. You don’t want to go to your community bank for a $10 million dollar loan or to Wells Fargo for $200,000. You get the picture. But the first thing you need to know is what type of loan you’re looking for.

Short Term Loans

This type of loan is typically used by businesses that need to build inventories or purchase equipment. Short-term loans are usually repaid as a lump sum, at maturity, and have a term of one year or less.

SBA Loans

Small Business Association Loans (SBA Loans) are for the purchase of real property. There are generally two types of loans through the SBA. A 504 SBA loan is comprised of a 50 percent loan from a bank, 40 percent from the government and 10 percent from the borrower. A 7A SBA loan is a government guaranteed bank loan for 90 percent of the financed amount.

The advantage of using an SBA loan is that it has only a 10 percent down payment, fixed interest rates, gives you the ability to finance building improvements and can be secured from a number of lending sources. But it’s not all positives. The flip side is there is a high cost for origination fees, collateral and personal guarantees and prepayment penalties. You will also need to show that your business is profitable and have been in business for a certain number of years to qualify.

Small Business Association Loans have low down payments (just 10 percent), fixed interest rates, and can be secured from a number of lending sources. This makes them quite an attractive financing option.

Conventional Financing

Although conventional loans are still available, lenders push many borrowers into SBA loans because the government guarantees the loans at 50 and 90 percent, thereby lowering their liability. However, if you have a Loan-to-Value ratio of 75 to 80 percent of the costs covered, good credit, a viable business with proven income or a solid business plan, you may still be able to go to your local bank for a conventional loan.

Seller Financing

For sellers who own their property free and clear, it may be to their benefit to finance the property themselves. Although there is no real benefit for buyers to obtain seller financing, you may be able to skirt some fees, appraisals and other expenses by going this route.

Asset-Based Commercial Financing

This type of financing is available to those with businesses that have positive cash flow. A lender will advance funds based on a percentage of the assets, and those funds can then be used to cover any current needs the business has. The lender typically takes a security position in the assets of the business.

Getting a commercial loan may seem intimidating, and having a professional who understands it will relieve some stress from the process. Alterra Real Estate Advisors has a team of professionals to help you make informed decisions regarding your current lease or purchase of a commercial real estate. Contact us today and let us help you build your dreams.  Brad Kitchen, President, Alterra Real Estate Advisors.

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