What Is a Business Mortgage Loan and How To Get One

Whether you’re updating your current business property or purchasing a new one, you’re likely going to be considering your business mortgage loan options. A business mortgage loan is similar to a traditional mortgage, except that the land being secured is for business purposes instead of residential ones. Let’s take a look at business mortgage loans, how to get one and what you should consider before applying.

What Is a Business Mortgage Loan?

A business mortgage can help business owners achieve their goals, whether that’s building or purchasing a new property or refinancing an existing property. This loan can be used for office buildings, shopping centers and other types of income-producing ventures.

The financing of commercial real estate properties includes acquisition, development and construction. They can also be used to refinance an existing business if the interest rate environment changes. For example, if interest rates are reduced, borrowing will become cheaper.

There are a few different types of business loans. Let’s take a look at what your options are.

Commercial Real Estate Loan

This is a common type of loan that enables you to build or purchase real estate for your business or refinance your existing business loan to save money.

Term Loan

This is a versatile loan that will help you purchase equipment, build your customer base, start a new project or expand your business.

Business Line of Credit

This functions similarly to a credit card. Your business can borrow a certain amount of money and then you’ll be charged interest on the amount you used. Then, once you repay the funds, you can continue drawing on the credit line.

Small Business Administration (SBA) Loan

This type of loan can be used for nearly all business purposes. To be eligible for an SBA loan, your business must:

• Operate for profit
• Be and operate in the U.S.
• Not be eligible to receive funds from other lenders

Additionally, a large amount of the owner’s own money and time must have been invested into the business for it to be eligible for an SBA loan.

What To Consider Before Applying for a Business Mortgage

It’s important to consider that because commercial mortgage lenders will only lend up to 70% of the property’s value, it’s up to the business owner to come up with the remainder before their purchase is completed, which can be a significant amount of money.

The length of business mortgage loans generally ranges from 5-20 years, with the amortization period being longer than the term of the loan. An amortized loan has scheduled periodic payments which are applied to both the principal and interest. When a borrower pays on an amortized loan, the payment will first go toward the interest expense for that period and then the remainder is put toward the principal.

Generally, longer amortization periods have smaller payments but higher interest costs throughout the life of the loan while shorter amortization periods have larger payments and lower interest.

How To Obtain a Business Mortgage

There is often quite a bit of documentation required when applying for a business mortgage loan. This is to ensure that you have a solid plan in place for your business and the ability to generate income from it to repay your mortgage.

Lenders thoroughly consider several financial requirements, including security, income and credit. Let’s take a closer look at each of these.

Security

First, lenders want to make sure that the business mortgage loan is secured by the property you’re seeking a business mortgage loan for. This means you’ll need to have around 30% equity in the property. If you’re purchasing the property, you’ll need a down payment of 30%.

Lenders will also want to make sure you have property insurance to protect against any damage.

Income

Your lender will want to make sure you’re generating enough income compared to your expenses so you can make your loan payments each month. To do this, they’ll generally ask for the last two years of your business and personal tax returns.

Credit

Your lender will check your business’s credit score, but many lenders may also ask to check your personal credit score, so you’ll want to make sure each is in good standing. They’ll also ask how long you’ve been in business. Keep in mind that you’ll need to have been in business for approximately one to two years. This is to make sure your business can bring in revenue, which is the main source of your loan repayment.

Dream Bigger With a Business Mortgage Loan

Starting or expanding your own business is an exciting adventure, but it’s important to make sure you’re getting started on the right foot. 7 17 Credit Union offers several helpful resources to help small businesses, such as our business mortgage loans. Explore our options and get started on achieving your business goals today!