Are You Opting for a Commercial Loan? This is what Professionals Do

Find the Right Mortgage for Your Business

Are you planning to start up a new business in 2018? If yes, then you might need a secure commercial loan to purchase or lease a property and raise cash flow for your business. However, there are various types of commercial real estate loans available that can leave you confused to choose the right commercial mortgage. Whether you already have a well-established business or are a startup entrepreneur, coming up with the right option of commercial funding can be rather baffling.

If you are a citizen of California, US, then you can find many finance companies that provide reliable and secure commercial real estate loans in Rancho Cucamonga. They have framed different types of loans in order to provide continual support to small ventures and large enterprises. Each of these mortgages has particular terms and requirements (credit and other qualifications) that make them suitable for certain types of business projects. Let’s take a look at the three different types of loans that you can choose from for your business:

SBA 7(a) loans

Small Business Administration 7(a) loans are one of the best approaches for kick-starting or expanding your business. The sole purpose of this mortgage is to help firms get the capital they need for maximizing their revenue and improving the bottom line.

The Small Business Administration (SBA) has many loan programs to provide affordable credit for small-business owners; even for those who were unable to secure loans from private or government lending institutions. Remember that SBA doesn't subsidize these loans directly; banks get an assurance that the SBA will reimburse a portion of the mortgage if you default on installments. Many studies demonstrate that the lion's share of SBA 7(a) mortgages are usually utilized for working capital, making leasehold improvements, and purchasing commercial properties. But they can also be used to buy equipment, acquire franchises, refinance other debts, and for various other purposes.

Let’s have a glimpse at the minimum requirements & loan terms of SBA 7(a):
  • Credit score: Take note of that most lenders requires a minimum FICO score of at least 680 to secure an SBA loan.
  • Down payment: You need to cover a minimum down payment between 15 to 20 percent of your business purchase price.
  • Cash flow: At least two years stable cash flow (more than $125,000 in annual revenue).
  • Interest rate: The current rate ranges from 6.75 percent to 8.75 percent, depending on the loan amount that you will borrow from a bank or a third-party lender.
  • Loan amount: While the maximum loan amount limit is $5,000,000, SBA has not set a benchmark for a lower limit.
  • Loan term: The typical time to repay an SBA 7(a) mortgage is between 5 to 25 years.

To be considered eligible for this loan program, you must meet SBA’s size standards. If you are in business for more than two years and looking for a long-term loan up to $5M, then you may qualify for 7 (a).

As far as startup companies are concerned, they can borrow funds or get a merchant cash advance from a professional and reputable loan provider.

CDC/SBA 504 loans

While these SBA mortgage types help entrepreneurs with starting up, maintaining, or growing their businesses, each has its own characteristics and benefits. The main difference between 7(a) and 504 is that 504 allows more funds than its counterpart. But the condition is that you can utilize this loan only to purchase ground-up construction land, existing buildings, or heavy equipment for your business.

Here are the minimum requirements and loan terms of SBA 504:
  • Credit score: Technically, there is no bar for the minimum score, but banks prefer a FICO score of at least 660.
  • Down payment: If you are already in business for more than three years and looking for a loan to buy a commercial real estate or some heavy machinery, then you need to pay 10 percent down payment. But if we talk about a startup, it will need a 15 percent down payment.
  • Cash flow: This requirement is same as 7(a). At least two years stable cash flow (more than $125,000 in annual revenue).
  • Interest rate: It has effective and low fixed rate that ranges from 3.8 percent to 5 percent. 
  • Loan amount: Typically $5,000,000 CDC Debenture maximum, but if a business owner needs proceeds more than $5MM for a venture and long-term assets, then the amount can be exceeded up to $12.5MM to $20MM.
  • Loan term: 20 years on the purchase of a land and ten years for equipment purchase.
If you’re running a company that is actively increasing its employees and undertaking big projects that might need the financing of more than $5MM, then SBA 504 loan is the best option for you as it has low-interest rates and only 10 percent down payment.Just make sure you meet SBA’s qualification criteria and have reasonable equity to get things moving.

Hard money loans

It is a valuable option for buy-and-hold investors who need a short-term loan to purchase or renovate a commercial or an owner-occupied property that doesn’t need to be revamped. To know more about hard money loans and their key merits, continue reading here

Now let’s check the requirements that are essential to secure this loan:
  • Credit score: Borrowers must have a FICO score of at least 620 along with a good credit history. 
  • Down payment: Before funding your loan, lenders typically require a down payment between 15 and 35 percent of purchase price.
  • Interest rate: The rates on this loan are a bit on the steeper side (between 7.5 percent and 13 percent).
  • Loan amount: You will get up to 80 percent of loan-to-cost (LTC) to revamp and buy an investment property. In case of purchasing a commercial real estate in good condition, you can get up to 90 percent of LTV.
  • Loan term: It usually goes on for a year, but can be extended to around 2 to 5 years in some cases.
Such type of loan is best for both short-term as well as long-term investors who just need to rehabilitate their properties.

Bottom line:

For all the above cases, the debt service coverage ratio (DSCR) is same.Generally speaking, the higher the DSCR, the better it is. However, the minimum ratio should be of 1.25 to ensure a positive cash flow.

Commercial real estate loans are geared towards encouraging social and national economic development. They offer influential flexibility, longer loan terms,potentially lower down payments, and fair interest rates compared to most other mortgages. You will find countless options, but choose a plan that can give an extra push to fuel your small business.

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