Considering a Commercial Mortgage Loan for Your Small Business? Here’s What You Need to Know

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Commercial real estate isn’t cheap. If you’re a small business owner who’s considering buying or further developing commercial real estate—whether that’s an office building, a shopping center, a hotel or another business-related property—odds are you’ll need to secure financing from an outside lender. In most scenarios, that usually means applying for a commercial mortgage loan.

Like the name suggests, a commercial mortgage loan is a financial vehicle that enables property owners to acquire, develop, build, and expand commercial properties. In exchange for funding, lenders—which are typically banks, trusts, and government-sponsored financiers—secure a lien on the property. In the event the loan is not repaid, lenders may be able to seize the asset to recoup their costs. With that in mind, let’s assess the pros and cons to find out if a commercial mortgage loan right for you.

Pros and Cons of a Commercial Mortgage Loan

Generally speaking, it’s better to own than to rent, assuming the financials make sense. But that doesn’t mean that buying is for everyone.

On the plus side, commercial mortgage loans enable businesses to acquire property, which may appreciate in value over time, delivering capital gains. Instead of writing rent checks that disappear each month, businesses that own properties write similar-sized checks to cover their mortgage bills, increasing their equity with each payment.

What’s more, assuming you pay your bills on time and are locked into a fixed interest rate, your mortgage payments will remain the same every month. This enables you to spend less time worrying about your finances since the payments are predictable, and gives you more time to focus on operating and growing your business.

Finally, in the event you end up with more commercial space than you need, you can always rent it out to another business, opening up an additional revenue stream.

Despite these benefits, commercial mortgage loans are not without their downsides.

For starters, you’ll likely have to put up a significant down payment in order to secure financing. Depending on your company’s financial situation, that may be easier said than done. Even if you can afford to put down 20 percent or more, you may run into cash flow problems after coughing up a hefty down payment.

When you buy property, you become responsible for its upkeep. Fingers crossed nothing major goes wrong. If your pipes burst or you need a new septic system, you can’t go running to your landlord to complain. You’ll have to figure out how to absorb the costs.

While property values generally increase over time, that’s not always the case. For example, if the economy takes a nosedive and you need to sell your commercial real estate at the wrong time, you could take a major loss.

Every business is in a unique position. While it certainly makes sense for some companies to secure loans to buy commercial real estate, other businesses are better off remaining tenants.

You know your business better than anyone else. Is real estate the best investment for your business? Only you can make the right decision.

How to Apply for a Commercial Mortgage Loan

Let’s imagine that after weighing the pros and cons of commercial mortgage loans, you’ve decided to apply for one. Here’s what you can expect during the loan application process.

First things first: You’ll need to gather an assortment of documents, including current business and personal tax returns, business-related financial records, personal and business credit score information, bank statements for personal and business accounts, asset and liability statements, profiles of business partners and directors, business plans, and possibly more, depending on the lender.

Lenders will assess this documentation to determine whether you’re a qualified buyer. Assuming you are, you can expect to fill out a bunch of paperwork to complete the application process. Once that’s done, an underwriter will assess your application and financial and business information to determine whether to lend you money. If approved, get ready to pay several fees (e.g., property appraisal fees, application fees, loan origination fees, legal fees, and surveying fees).

Keep in mind that—since so much money is involved—it can take three or four months for lenders to process commercial real estate loans. You may be out of luck if your decision to purchase a property is time-sensitive.

What Are the Most Common Interest and Repayment Terms?

Interest rates and repayment terms for commercial mortgage loans vary from lender to lender.

Generally speaking, here’s what you can expect when you secure financing from a traditional banking institution:

  • You can get up to 85 percent of loan-to-value
  • Loan terms range anywhere between 5 and 30 years
  • Interest rates hover between 5 percent and 7 percent
  • Companies need to have been in business for at least two years to qualify

Other options for financing—like hard money loans and financing given by soft money lenders—may carry higher interest rates (e.g., 10 percent to 12 percent) while offering shorter repayment terms (anywhere between six months and three years). Financing for commercial real estate can also be obtained through loans sponsored by the Small Business Administration, which are notoriously hard to obtain.

Now that you’re familiar with commercial mortgage loans, it’s time to do your due diligence and determine whether it makes sense for your business to become a property owner.

Take your time and thoroughly assess your options before making a decision because, whatever you do, you can’t afford to make the wrong one.

Contributor: This guest post was written by Justin Reynolds, business writer for Fundbox. Justin enjoys exploring how technology, science, and creativity can help entrepreneurs be more productive. 


The SmallBizRising Blog is designed to be an educational content hub pulling information, best practices and practical advice for the small business owner and features topics including accountingmarketingtechnology and more.  Be sure to subscribe to stay up to date with new content as it is posted.  The blog was created by The Neat Company and receives contributed content from a group of contributing companies that provide technology, services and solutions to small businesses.

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