What Type of Commercial Real Estate Loan or Financing Option is Right for Your Business?

Various types of commercial real estate loans are available due to the fact that there are different types of commercial business ventures.  In general, the loan or financing method is for the purchase of property. The funding for purchase can be compared to a loan for residential real estate where the collateral to secure the loan is the property itself.  After the loan payments are finished the businessman or entity then becomes the owner and can use the value of the property as collateral in a future loan.

One type of commercial finance structure is called an owner-user loan. In this case, the property is used to conduct business, for example, a physician purchasing a building to run his practice or a cell phone company purchasing property to house their business and product.  Most of the time these loans are for start-ups, but not always. The bank or lending institution will most likely want to see the business owner’s personal credit score before qualifying them for the loan.

Another type of commercial real estate funding may be an investment property loan. In this case the property itself will be used to make money, for example, a shopping strip leasing space to tenants or an apartment renting units. Again, if these businesses are start-ups then personal credit becomes extremely important for qualifying.

The final type of loan is called a hard money loan that is used for commercial real estate development projects.  Older buildings purchased for rehab, new construction, or conversion projects all may fit into this financial mold.  Hard money loans are usually designed to avoid early payoff fees as well as other fees associated with early payoffs.  Banks set these prepayment fees and enforce them so they do not lose out on making the interest money after spending their time and money toward due diligence for the commercial real estate project.

As a businessman you should understand the basic concepts of a loan and the loan structure.  Be prepared to show a good credit score or construct a joint venture with a strong borrower.  Understanding the individual underwriting criteria for these loans will also help you negotiate terms.  You may want to consider a financial consultant or business professional to help you make the best decision on your commercial real estate funding options.

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