Many business owners jumping into the world of commercial real estate lending are surprised when they discover that the requirements can be very different from those of residential mortgage lending.
Instead of a handful of pages of information, a few bank statements and proof of employment, business owners looking for commercial loans are often asked to perform Herculean tasks in order to get an approval for their own little piece of land.
Easing the Pain of Commercial Down Payments
If your business is trying to secure a commercial real estate loan through a traditional bank, you’ve probably already been given the shock of your life when you were told you might need as much as a 30 percent down payment. It seems steep, to be sure, especially when compared to residential lending, but there’s a reason for so much money up front.
You’ve probably heard that private mortgage insurance is about the worst thing you can have on a residential mortgage loan, but the truth is that those insurance payments are the reason that residential mortgage lenders don’t require a much larger down payment when you’re trying to buy a house. Since commercial lenders don’t have the protection of private mortgage insurance on your commercial real estate loan, they have to be sure that your property will maintain enough equity to resell without suffering too much of a loss.
Enter the SBA 504 Commercial Loan
Just because your lender wants more of a protection against default doesn’t mean that it’s a good thing for your small business.
That’s why the U.S. Small Business Administration decided that it was time to help, and developed a loan program in conjunction with certain large banks that helped balance the risk. Instead of the bank carrying all the load, the SBA secures a portion of your commercial loan, too. This allows you to bring a down payment as low as 10 percent, if your business qualifies.
Ten percent down is a lot better than 30 percent, but for small businesses in high priced areas, even that much can be a lot of money to produce. This is where grants come in. The SBA also offers a list of government departments that can help provide funding for your commercial loan down payment. Since there’s no expectation of repaying a grant, these options won’t add to your debt load or become a financial burden for your business.
Commercial real estate loans generally require a little bit of money to be injected into the equation to ensure that the bank will be covered no matter what happens to your real estate. But if your business is short on cash and long on needing a place to make permanent camp, grants and SBA 504 loans can help you get to your ultimate goal sooner.