First-time commercial borrowers often experience sticker-shock when they begin looking into financing options for business loans, even on owner occupied property financing. In the private mortgage realm, owner-occupied private mortgages are eligible for low mortgage rates because they are considered low-risk. Not only is it unusual for a resident homeowner to default on a loan, but those loans are often backed by a government guarantor like Fannie Mae.
However, commercial property carries with it a higher risk of default and is not, generally, going to be backed by a government guarantee. This can mean higher interest rates and more stringent borrowing guidelines for business owners, even those who occupy their commercial property.
While obtaining owner occupied property financing was never quite as simple as obtaining mortgages on privately-held residential property, commercial property financing has become even more difficult after the mortgage crises. There are a variety of ways for owner-occupiers to obtain financing for commercial property, here are a few:
1. Commercial Mortgage
The first method is a commercial mortgage. Generally, commercial mortgages can be for up to 75% of the value of the property financed, but with 10-20 year repayment terms, not the longer terms available in the housing market. Borrowers must be able to show sufficient cash-flow to repay the mortgage, which may result in mortgages with balloon payments or other means of escalating payments over time.
2. Asset Based Loans
The second method is an asset based loan, which is based on the current value of the company’s assets. An asset based loan is not restricted to property financing, but can be used to finance property. However, the big difference is that the assets on which the loan was based, such as equipment, would serve as security for the loan.
3. Term Loans
Term loans, which are based on projected profit and cash flow, could be used to fund business property or to expand on currently-held property. The terms of these loans generally vary from 1 to 10 years, and the interest rate will depend upon the assets, projected profit, cash flow, and overall creditworthiness of the business.
Finally, many smaller businesses look to financing that is outside of the traditional commercial financing structure when financing business property acquisitions, which could include using personal credit or using personal assets as security for business loans.