Last Updated on July 9, 2023 by Gerry Stewart
Are low down payment commercial loans right for you? Or should you stick with traditional bank financing instead?
There are two types of commercial real estate loans available today: conventional and nonconventional. Both come with their own set of advantages and disadvantages.
In this blog, we will review the pros and cons of each type of loan, and help you decide which type of loan makes sense for you.
Why Low Down Payments on a Commercial Loan are Good For You in San Diego
If you have a commercial loan with a low down payment, you can save money by paying less interest. Although this may seem counterintuitive, if you make monthly payments, you won’t be able to afford to skip any payments or miss one without incurring late fees. So, if you’re looking at a loan with a low down payment, make sure you understand how much extra interest you’ll pay each month.
A commercial real estate loan differs from other kinds of loans in that you don’t need collateral for the loan. This means that your business itself is considered as collateral. The lender doesn’t care what kind of business you run; they just want to know that you can repay the loan.
Commercial property loans are also good because there’s no prepayment penalty. If you sell your building to another business, you still owe the same amount of money. However, there is a prepayment penalty when you sell your property outright.
The downsides of low down payment commercial loans include higher rates, more paperwork, and more restrictions.
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Since most commercial real estate lenders require a minimum down payment, borrowers must put up more equity than if they were using a personal loan. When you borrow $250,000, you only need to put down 10% of the total cost of the property (or 20%). But with a commercial loan, you need to provide 25% to 50% of the purchase price.
This increases your borrowing costs. In addition, since the borrower puts up more equity, the lender gets to keep the difference between the original sale price and the current market value.
When you apply for a personal loan, your lender needs proof that you have sufficient funds to cover the entire loan amount. With a commercial loan, however, the lender requires documentation showing that the borrower has enough cash flow to service the debt.
This includes things like financial statements, tax returns, and profit-and-loss statements. These documents show the borrower has access to enough money to meet his obligations over time.
Investment property loans are typically used for larger purchases. They also carry fewer restrictions than those for owner-occupied properties.
However, investment property loans do not offer the same level of protection as a home mortgage. Unlike a residential mortgage, where the lender backs the title to the house, the investor owns the property until he sells it. If the buyer defaults, the seller loses his or her investment.
Lenders who specialize in commercial real estate loans usually charge more than banks and credit unions. Because these loans are larger, they often come with higher rates.
You also have more flexibility with a commercial real estate loan. You can use the money for anything related to your business, including equipment, inventory, and even advertising.
Restrictions on Use
Another downside of low down payment commercial mortgages is that they restrict the way the money can be spent. For example, some investors will ask that the money be used for improvements to the property or for renovations.
Most lenders will allow you to use the money for operating expenses, but not for capital expenditures. Capital expenditures are large investments, such as new computers, furniture, and machinery.
Some lenders will limit how long you can take to repay the loan. If you don’t pay back the full amount within six months, you may lose your right to make future payments.
If you’re looking to finance a large purchase, consider applying for a commercial mortgage instead of a traditional bank loan. The interest rate may be lower, and you’ll get to use the money for any purpose.
How to Choose the Best Loan Type for You
Commercial loan programs differ from one another based on their intended use. Here’s what you should look for when choosing which type of financing works best for your particular situation:
1. What Is Your Purpose?
The first thing you’ll want to decide is why you need the money. Do you need to buy land or build a building? Are you buying equipment or paying off old debts?
Once you know your aim, you can narrow down your choices by figuring out whether you want to borrow from a bank, a credit union, or a private source.
2. How Much Money Do You Need?
Next, calculate how much money you really need. Don’t go overboard; if you plan to spend $50,000 on a new computer system, expect to put up at least 10% down.
3. How Long Will It Take to Pay Off?
Once you’ve determined what you need for your commercial business loan, you’ll need to think about how long you plan to keep the money.
For instance, if you plan to use the funds for three years, then you’ll need to set aside 15% of the total amount each month. This means that after three years, you’ll only have 85% of the original amount left.
4. How Easy Is It to Get Approved?
Finally, figure out how easy it will be to secure approval from the commercial loan officer. Some lenders require collateral, while others accept personal guarantees.
5. Who Can Help Me?
Don’t forget about other factors that might influence your choice. For example, some states have laws regarding the minimum age of borrowers. In addition, certain industries may be better suited to certain types of loans.
6. What Fees Might I Have to Pay?
Finally, check out the fees associated with each option. Lenders typically charge different rates for construction loans versus different business loans. Loan closing costs also vary widely between lenders.
When to Apply for a Low Down Payment Loan
The best time to go through the low down payment commercial loan process is when you’re ready to close on the deal. You should apply before actually purchasing the property so that you have enough time to find a lender who fits your needs.
Operating income can fluctuate significantly over short periods of time. Therefore, it’s not advisable to wait until you have a steady stream of income to apply for a commercial loan.
However, sometimes waiting makes sense. For example, if you’re planning to sell your current location as part of the transaction, you may not want to move your entire operation too quickly.
You should also weigh your risk tolerance against the potential benefits of the loan. Your income ratio (the percentage of monthly revenue used to pay interest) should be within 3-10 percent of your net operating income.
If you are working with a partner or investor, discuss any expectations they have for your personal finances. If they don’t mind a higher rate of return, then you may benefit from a lower cost loan.
What Happens After Applying for a Business Loan?
After you submit your application, your lender will review it and determine whether they’ll fund your loan. They’ll usually send you a letter explaining the terms of your loan, including the interest rate, repayment schedule, and the expected payoff date.
A commercial real estate mortgage broker can help you navigate this process by providing information about which lenders offer which products.
Eligibility requirements vary depending on the product offered by each lender, but include proof of sufficient income or assets, as well as business experience. Lenders typically require that borrowers have at least 3 years of operating history in order to qualify for a traditional loan; however, some companies may accept less time if you’re able to provide documentation that shows how much your company’s sales have grown over the past few years.
Once you’ve been approved for a loan, a payment requirement is set up based on how long it takes you to pay off the loan. Typically, the longer you take to repay the loan, the more payments you’ll be required to make.
The amount of money you borrow will also affect the number of monthly payments you need to make. For example, a $50,000 loan with a 5-year term would likely result in one monthly payment of around $500, while a $100,000 loan with a 10-year term would result in two monthly payments of around $1,000.
How Long Will it Take to Close?
Commercial lenders often take twenty-four hours to complete the final paperwork and fund your loan. This depends largely on how busy their processing department is during the month you apply.
It’s important to plan for closing costs. These expenses can add up fast, especially if you’re buying multiple properties.
Financing options for commercial real estate loans can be confusing, and the loan application process is no different. However, most lenders today use software programs to verify your credit score, which helps them better assess your ability to repay a loan.
Your credit report will also contain information about your previous debt obligations, such as mortgages and auto loans. This data will be used to calculate your overall debt-to-income ratio, which determines how risky your loan request is.
What Happens If You Fail to Pay Back the Loan?
If you fail to pay back your commercial loan, then the lender will take legal action against you. The lender will ask the court to order you to pay back the money. This usually happens when you do not make any payments for a long period. It is likely that you will lose your business. Your business could even go bankrupt.
The lender will try to recover their money from you through the courts. They might sue you for breach of contract. They might try to get a judgment against you. A judgment means that they win their case against you. You will probably have to pay them back what you owe them.
You might not know that you are in trouble until it is too late. The lender might take steps to collect the money from you before you realize that something is wrong. For example, they might send you letters demanding payment. Or they might call you up at work and threaten to shut down your business unless you pay them back.
Sometimes, the lender might use a collection agency to help them collect the money. A collection agency is a company that collects debts owed to people like you. They sometimes hire lawyers to help them collect debts.
How Much Money Am I Really Saving by Using a Low Down Payment Commercial Loan?
The answer depends on how much money you want to borrow, and what kind of loan you choose. A commercial loan has lower monthly payments than a personal loan, but also higher interest rates. If you need $100,000 for your business, then you should a commercial loan.
Your business credit score matters in determining whether you qualify for a commercial loan. Lenders look at this score to determine how likely you are to pay back the loan. If your business has an excellent credit history, then you may obtain a commercial loan without having to put down much of the total loan amount upfront.
However, if your credit score is bad, then you’ll need to put some money down to show that you’re willing to pay back the loan if you don’t perform well financially.
A high debt-to-income (DTI) ratio shows that you have other consumer debt, which makes it hard for a lender to trust that you’ll be able to pay back a commercial loan. On average, DTIs range between 40% and 50%.
Competitive interest rates can vary depending on the type of commercial loan you apply for. Some lenders offer very competitive rates on business loans with no collateral. Others charge more for these kinds of loans because they don’t require collateral.
Some businesses prefer to avoid putting down collateral because they think it’s easier to pay off a loan if there isn’t anything tied up in the transaction. But if you default on a loan, then the lender can repossess whatever property you used as collateral.
Wrap Up With A Bonus Tip on Choosing the Right Loan Type
Low down payment commercial loans are great for small businesses that need access to capital quickly. However, you must be careful when choosing one.
Before applying for a commercial loan, make sure that you do your research. Understand the different commercial loans available and find out which ones best suit your needs.
Doing this will save you time and money. And it will give you peace of mind knowing that you made the right choice.
To learn more about these options, please call us at (888) 653-0124 today!