When searching for a commercial business loan, there are many types out there, and if you have little experience with commercial business loans, it is smart to seek an accountant’s advice before you sign on the dotted line. There is so much that differs between types of loans, types of business, how much risk the lender is willing to take, and what is available in different areas. It is always wise to seek expert, professional opinions. However, for the purposes of information, we will discuss three types of commercial business loans in this blog post. Be aware there are more than three types of loans – and there may be differing circumstances for those who seek them than what is discussed here.
Three Types Of Commercial Business Loans
- Long-term fixed interest commercial mortgage
- Interest-only payment loan
- Hard money loan
The most common type of commercial business loan is the long-term fixed interest commercial mortgage. However, it is not the same as personal residential fixed interest mortgages, and it can be a little harder to get. In general, those who qualify for this loan have excellent credit – typically above 700, and some lenders require the 750 range. Why? This is a somewhat riskier loan than other loans, because they are not 30 year loans. Most are five to ten year loans, and almost never exceed 20 years. They also have rules that can be strict for the business owner, such a minimum of 51% occupancy of the commercial property that has the loan on it by the owner’s business, and that the owner must have already been in business one year. With a fixed rate mortgage, the interest does not change, but variable interest rate mortgages, you could see anywhere from 4.5 – 6.75%, dependent on market trends.
Interest only payment loans are sometimes referred to as a balloon payment, and that’s because nothing has to be paid on the principal each month – only the interest needs paid. These loans are typically used by business owners who expect a large income at a later date when they can make large payments towards principal. They may use this loan to build up their business – when things are slow initially, or until they really have a chance to get the business going, large amounts aren’t due, but typically, large payments must be made on the principal amount in increments such as three years or five years. Sometimes, businesses take out these loans with the intention of refinancing the principal amount later.
A Hard Money loan is a much different type of loan than what most people are typically used to dealing with. The source of money isn’t usually from public institutions but rather from private investors who are knowingly taking lending risks that are based far more on the proposed commercial property than on the borrower or the borrower’s credit history. In general, hard money loans are short term financing, sometimes as short as a year. Interest rates can reach as high as 18%, and there may be more up-front fees.
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