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Business Property Loan - Business Property Loan Considerations

amount loans appraisal commercial

A business property loan is also known as a commercial property loan and gives business owners the cash they need to invest on new property to start or expand a business. Because many small businesses lack the capital or financing they need to make these types of large scale investments, many business owners turn to business property loans to help secure the building or other commercial space they need to run the business and make a profit.

Commercial space is considered as anything that is not zoned residential. For example, a single family home, row home, duplex or triplex is considered a residential home. However, a larger apartment building with space to accommodate more than five families is usually considered a commercial building. Other commercial properties include hotels, motels, storefronts, a storefront with residential apartments included, gas stations, self storage units, trailer parks, campgrounds, warehouses and others.

A small business owner has a few options when securing a property loan for business expansion or start-ups including government guaranteed SBA business loans, traditional mortgages and “hard money” business loans. Typical business property loans will finance anywhere from $250 thousand to $10 million and this includes loans made by the government guaranteed business loans, including section 7a and 504 loans.

Most business loans have terms form five to 30 years and offer refinancing and early pay out options in addition to other various options, such as the ability to borrow from 75 percent to 125 percent of the business’ total property value, among other options. All options depend on the type of business loan and property chosen by the owner.

If a business owner is thinking of choosing a traditional bank for obtaining his loan, then that owner must prepare first. Business property loans from a bank have many requirements including the need for reference with a good credit score, a great credit history, a way of securing the loan (collateral), the appraisal value of the property and the amount of down payment the business owner can make.

The amount of the business property loan is decided on many factors, of which the appraisal is needed. The appraisal looks at numerous items, just as a residential appraisal does and not only includes the condition of the roof, plumbing, electrical systems, but also the accessibility to the business, the total size of the land including parking space and square footage of the office or storefront and the location of the business property, among other items. This appraisal keeps the lender from loaning more money than the business property is worth overall, which in turn reduces that lender’s risk in making the loan.

One other important factor when searching for a business property loan is the DSCR, or the Debt Service Coverage Ratio, which estimates the amount of cash the property can generate on a monthly basis. The DSCR takes into account the amount of the proposed mortgage for the business property loan and pits it against the sales, rents and other fees collected by the business. The net cash flow amount shows the loan institutions about how much the business can reasonably afford to finance and pay back without a hassle.

The ratio of the amount against the mortgage should be between 1.1 and 1.4, though the higher the ratio the better it is for the borrower. A ratio of 1.4 means that for each dollar of the mortgage or financed amount that is paid back, theoretically the mortgaged business property would bring in $1.40, meaning the entire financed amount would be paid back with no problems because the business property’s revenue is greater than payments. However, this ratio does not take into account other bills and fees the business must pay out in addition to paying back the financed amount.

Business property loans come in all sizes and each type has different requirements. When searching for a business property loan, be sure to address all concerns including interest to be paid, monthly principle amount, length or term of loan and other terms of the loan contract before signing any loan or financing agreements, especially if it is the first business property loan ever taken on a property.

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7 months ago

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