Small Business and Real Estate Loans

Get a Commercial Real Estate Loan for Your Small Business -- stock.xchange

Get a Commercial Real Estate Loan for Your Small Business — stock.xchang

Article written by Deborah S. Hildebrand Harris

Las Vegas dentist Chris Cozine wanted to cut costs after the Great Recession. He found an unlikely way: He ditched the office he was renting and bought 6,600 square feet of his own. 

Besides improving his surroundings – he left the gray walls of the old place in favor of an open layout with modern glass tiles and a mix of colors – Cozine is paying $1,800 a month less on the mortgage than he was paying in rent. 

“I save money, but the icing on the cake is that the office decor is of my choice,” Cozine says.

This story appeared in the Huffington Post in July 2012. However, Cozine is just one of many small business owners who have opted to buy instead of rent their office or business space. Just like renters who become homeowners, buying property is often a better, wiser, choice.

Find the Right Real Estate Loan for Your Needs

Recent news reports indicate that small business lending is on an upward climb. This includes commercial real estate loans under $1 million. That means now is a good time to get the loan you need. Here are some of the loans you might consider depending on your individual situation.

Type of Loan




Purchase money loan A private loan between the buyer and seller. Generally used when you can’t qualify for a traditional bank loan. Seller
Refinance loan Paying off an existing loan with the proceeds from a new, updated loan for the same amount. May include a “cash out” portion. To obtain better terms and rates when the market changes. Banks and other financial institutions
Bridge loan A temporary, short-term loan, typically with larger upfront fees and higher interest rates. Used until you secure permanent financing or remove an existing obligation. Private money and sub-prime lenders
Mini-perm loan To buy property or build on it. Used to establish an operating history to obtain a term loan. Banks
Second mortgage A second loan on the same property. Used for debt consolidation or to obtain cash equity. Banks and other financial institutions
Hard money loan The value of the property backs it, not your creditworthiness. Usually offers lower loan-to-value (LTV) ratios, but higher interest rates. Considered by some to be a loan of last resort. Private lender

The type of commercial property you purchase – retail, multi-family apartments, industrial, office, or something else – will have a big impact on your loan terms and conditions.

Lenders are not in the real estate business. If they have to take ownership of the property, they’ll want to liquidate it quickly to reduce their loss. Therefore, office buildings and strip malls are easier to turnaround than churches and auto dealerships.

SBA Loans for Commercial Real Estate

One of the best choices for entrepreneurs and small business owners when it comes to commercial real estate loans is the Small Business Administration (SBA). They offer these commercial-property financing options.


7(a) Loan

504 Loan

Purpose Owner-occupied commercial real estate purchase, refinance, or construction Owner-occupied commercial real estate purchase or construction
Loan amount Up to $5 million Up to $11.5 million; higher for qualified manufacturing firms
Interest rate Typically, prime + a margin not to exceed 2.75% Generally 3% to 6%
Term Up to 25 years Up to 25 years for real estate; 10 years for equipment
Prepayment penalty Yes Yes
LTV (lesser of appraised value or the selling price divided by mortgage amount) Up to 90% Up to 90%

Keep in mind that the SBA is not a lender. Their purpose is to guarantee the loan. Lenders — banks, credit unions, private lenders — are responsible for setting the interest rates. 

Factors Influencing Your Real Estate Loan

As you look for a commercial real estate loan, consider these factors:

Buyer. Determine if the buyer is you or your business entity.

Cash flow. Cash generated by your business is the number one criteria used to determine the amount of your commercial real estate loan.

Collateral. In addition to a down payment (see below), you may need collateral such as business machines and equipment, accounts receivable, or even personal assets. 

Documentation. Be prepared to provide income statements, balance sheets, statements of cash flow, and tax returns for the last three to five years. Additionally, you may be required to supply this information on a regular basis over the course of the loan.

Down payment. As with any real estate loan, the larger the down payment the better the terms, conditions, and amount of the loan.

Lender size. Some experts suggest matching the size of the loan with the size of the lender. Small loan means small lender, and vice versa.

Loan amount. Clearly identify your property needs and then thoroughly research real estate in your area.

Repayment plan. Know how you will repay the loan before you get it. Otherwise, lenders will likely hesitate.

Terms. Be sure you understand all the loan terms, conditions, and covenants before you accept the loan.

Steps to Ensure You Get the Best Commercial Real Estate Loan

When it’s time for you to secure a commercial real estate loan for your small business, you may want to follow the advice from this All Business post:

  • Thoroughly research your loan options by starting with your own banker and the SBA
  • Hire a commercial real estate lawyer to help you understand and negotiate the best deal
  • Have a business plan and the proper documentation
  • Be prepared to invest your own money
  • Analyze your cash flow

Taking the time to get the help of a commercial real estate expert before you decide can get you the best property and loan for you. As Cozine says in the Huffington Post article, “I look at my office as a retirement nest egg.”

Source: The Business Finance Store

The Advantages and Disadvantages of Equity Financing

By Clay Wyatt

Equity financing involves exchanging ownership of your business for funding. In other words, you must sacrifice a percentage of your business (including profits) to a third party to raise funds in this manner. Typically, you can get this type of funding from angel investors, employees, family and friends, industry colleagues and venture capitalists.

This form of financing comes with numerous advantages and disadvantages. These are as follows.


No Debt

For business owners who wish to avoid debt, equity financing does just that. By taking on investors instead of loans, you won’t have any debt obligations.

Outside Assistance

Anyone who invests in your business will want it to succeed. Thus, an angel investor, industry colleague or venture capitalist with related experience may offer valuable tips to help your business grow.

Improved Employee Performance

If employees invest in your business, they’ll have an extra incentive to perform well. This is why many businesses offer employee stock plans.


Regulatory Burden

There are complex legal and regulatory issues involved in the process of equity financing. Complicated reporting is needed for investors at the end of each fiscal year, meaning that you’ll have to hire an accountant to deal with it!

Decreased Control

By enlisting investors, you’ll decrease the amount of control you have over your business. An investor will generally want some control over the outcome of his or her investment.

Note that a professional investor and even Uncle Joe may become very demanding. For example, if you want to close down for 2 weeks for a vacation, will an investor with 20 percent equity be comfortable with the foregone revenues?

Additionally, there are times when investors force out the original owner, which means you could have to send out resumes again if things start to go downhill!


Equity financing has numerous advantages. With it, you’ll avoid debt. Also, you’ll potentially gain expert advice from investors, which could increase the success of your business. Additionally, if employees invest in your company (now or in the future), they’ll have an extra incentive to perform well.

On the downside, Uncle Sam will put up some red tape via the mentioned regulatory burden. Also, most importantly, you’ll lose some control of your company. This is the largest risk you’ll face, as it could result in you being kicked out of the company you built!

Carefully consider the advantages and disadvantages of equity financing before deciding whether or not to use it. In a nutshell, if you can live with others having a say in your business and can deal with some extra regulations, then you can avoid debt and possibly get some expert advice.

Via: Business Finance Store  

(CFO On Call UA-38359200-1)