Funding your business is not an easy task. One wrong decision can push you back drastically and its impact can have a dire impact on your business. So, when you’re looking to finance your business – big or small – it is important to understand the nitty-gritty of the loan you’re looking to opt for. There are varieties of finance options available and among these, commercial real estate loans often stand out. But how do they really stack up against other types of business loans? And is it the right loan for your business? Let’s break it down for you:
What are Commercial Real Estate Loans?
Like the name suggests, commercial real estate loans are given by keeping the commercial property itself as collateral. Businesses generally opt for these loans when they need large capital or when they are looking to acquire office spaces, retail locations, or industrial properties. Since the property itself provides significant collateral, it reduces the lender’s risk. So, in this way, it is a win-win product for both the lender and the borrower. But let’s check out other business loans before zeroing on this one.
What are Other Types of Business Loans?
Before we compare, let’s quickly review some common types of business loans:
- Term Loans: These are lump-sum loans that are repaid over a fixed term with a set interest rate. Term loans can be used for various business needs, from expansion to equipment purchase.
- Revenue-based Loans: Revenue-based loans are a way for a company to raise money from investors who get paid a portion of the company’s continuous gross revenues in return for their capital.
- SBA Loans: Government-backed loans provided by the Small Business Administration, offering favorable terms and lower interest rates but with stringent qualification requirements.
- Lines of Credit: Flexible financing options that allow businesses to borrow up to a certain limit and repay as needed, similar to a credit card.
Commercial Real Estate Financing vs Other Business Loans
Loan Amounts and Terms
Commercial real estate loans typically offer larger loan amounts compared to other business loans. This is because the property itself provides substantial collateral, reducing the lender’s risk. For example, you might secure a commercial real estate loan for millions of dollars, whereas a term loan might cap at a few hundred thousand.
- Term Loans: Generally smaller amounts, shorter terms.
- Revenue-based Loans: Smaller loans with shorter repayment terms.
- SBA Loans: Can offer large amounts but still typically less than commercial real estate loans.
- Lines of Credit: Flexible amounts, often smaller than term loans.
Interest Rates and Fees
Interest rates on commercial real estate loans can be higher than those on residential mortgages but are often competitive with other business loans. However, they may come with additional fees, such as appraisal fees, legal fees, and prepayment penalties.
- Term Loans: Moderate interest rates, fewer fees.
- Revenue-based Loans: Higher interest rates, with fewer upfront fees.
- SBA Loans: Lower interest rates, but high qualification standards.
- Lines of Credit: Variable interest rates, potentially higher costs over time.
Collateral and Risk
Commercial real estate loans are secured by the property itself, which can be a double-edged sword. On one hand, it makes it easier to secure a large loan. On the other hand, if you default, you risk losing the property.
- Term Loans: May or may not require collateral.
- Revenue-based Loans: Generally unsecured, with lower risk for borrowers and higher for lenders.
- SBA Loans: Often require personal guarantees and collateral.
- Lines of Credit: Typically unsecured, but higher interest rates reflect the risk.
Advantages and Disadvantages of Commercial Real Estate Loans
One of the direct advantages of opting for commercial real estate financing is to access larger funds. It also offers smart tax deductions that can significantly benefit the borrowers. The fixed monthly payment that the loan provides implies better budget management in the long run.
While the benefits are appealing, the higher upfront costs and the significant risk of losing the property in case repayments falter, should not be taken lightly. The commercial real estate loans also come with a rigorous approval process, demanding meticulous documentation and scrutiny.
Which Loan is Right for You?
Choosing between a commercial real estate loan and other types of business loans depends on your specific needs and circumstances. By understanding how these loans compare to other business financing options, you can make an informed decision that best supports your business goals.
So, whether you’re eyeing that prime office space downtown or looking to expand your retail footprint, knowing your financing options can help you make the best choice for your business’s future.
