Usually, a commercial mortgage can be availed for a 3-year term to a 25-year period. The lengthier the repayment term, the lesser the rates would be. Still, it would be determined based on the risk factors, which is assessed by the lending party after due analysis of the borrower’s financial history. Sometimes, this type of loan can also have a variable rate agreement, which means that the repayment amounts can fluctuate every month. The variable rate is decided based on the scope and potential of the business as well as the property value. 

Applying for a Commercial Mortgage

A commercial mortgage is usually chosen by businesses when they need some additional funding to buy a new property for business expansion or to save on their monthly rental overheads. This can also be a good option for those who already have a property – they can release the value of the building to use the funds for other business ventures.

You can apply for a commercial mortgage even if you have a bad credit score. All you need to apply is the previous years’ profit/loss statements, rent roll, tax returns, photos of the property, and personal financial statement. You can also produce summaries of capital improvements to get the loan approved quickly. However, as the risk would be more here due to your poor credit score, the interest rates could be very higher.

Note that the lending institution would also perform a standard valuation of the property before approving the commercial mortgage. Moreover, there can be additional costs too, such as arrangement and legal fees. Therefore, it is better to clarify every detail carefully before applying for the funding.

Types of Commercial Mortgages

Generally, commercial mortgages are categorized into three types: owner-occupied, residential buy-to-let, and commercial buy-to-let. The first type is meant for businesses that are either looking to buy the building or space where they are currently operating or want to buy a new property to shift their business operations there. Residential buy-to-let funding is meant for those businesses that want to acquire a residential property loan to free up their business operations.

Commercial buy-to-let is similar to the residential buy-to-let type of mortgage; the only difference here is the type of property the business is looking to buy. For instance, this type of funding can opt when a company wants to buy a commercial warehouse to let it out to other businesses. This is the most difficult type of commercial mortgage to acquire though.

Pros and Cons of a Commercial Mortgage

The most striking benefit of choosing a commercial mortgage is that you would not have to pay any monthly rentals anymore. This can be a great thing when you are looking to explore new markets and planning to grow your business reach. You can customize the space as you want and change the layout to suit your business operations as applicable too. Besides, if the repayments are higher than what you can bear, you can always sub-let a free portion of the property to another party for a monthly lease. However, you would need to get permissions from your lender for that.

The interest on the repayment amount for a commercial mortgage is tax-deductible, so that would reduce some financial burden from your shoulders. What’s more, as the value of the real estate grows, the capital of your business would also go higher. Yet the main drawback of this type of small business funding is that you might need to pay a considerable deposit upfront to buy the property. This is usually around 20% of the commercial mortgage amount. In addition, if the commercial mortgage rate is variable, then you cannot determine the exact interest amount to be paid per month, and it can go up any time.

Another downside of buying a property is that you can no longer move to another location in case your business demands it at some point. On top of that, you would be responsible for the maintenance of the building and fixing any problems like HVAC repair or broken windows. Note that if the real estate value drops at any time, the capital of your business will also decline with it. So it is better to weigh all options before making the decision.

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Loan vs. Mortgage

Small businesses looking to secure funds for various business needs such as purchasing equipment, managing inventory, buying a property, or running their daily operational costs can go for a business loan. Some lending institutions might require the loan to be secured against collateral, but it is not always mandatory, and the terms and conditions can vary from lender to lender. Such a funding option can be very beneficial in order to cover any type of unexpected expenses.

Mortgage loans, on the contrary, are required to be secured against any commercial property. The ownership of the property would remain with the borrower, but he/she would have to agree to repay the loan amount in regular installments until the term is completed. Besides, a mortgage loan is approved only if the lender finds the borrower credit-worthy enough to repay the loan, and the property value good enough to cover the amount.

Purpose and Types

A business loan usually opts for the expansion of the business. The borrower does not necessarily need to secure the loan amount with any type of commercial property, especially if approaching online lending for the funds. The loan can be long term, short term, secured, or unsecured. No matter what the type of loan is, online financing would get approved very quickly and can be used for any and all needs of the business.

A mortgage usually opts when a small business wants to acquire, refinance, or redevelop a commercial property such as an office building, a warehouse, a shopping center, etc. Typically, the loan amount would be based on the value of the property put as collateral, with most lenders offering a loan amount that is lesser than the property value. Mortgages can be fixed-rate, adjustable, and reverse type, which need to be secured with collateral.

Rate of Interest

An unsecured business loan can bring into play higher rates of interest when compared to a mortgage loan. That is because it is considered to have a higher risk when the funds are not secured with collateral. Besides, the borrower would need to have a reliable financial history to get the loan approved. Mortgages, as said, would be based upon the value of the property, and if the borrower fails to repay the loan amount, the lender would seize the commercial property put as collateral to settle the funds.

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Preparing a solid business plan is the best way to estimate the costs, which you might have to bear in the future. It is recommended to prepare a business plan for at least 3 to 5 years, including financial projections such as the expected expenses and estimated revenue. After you have the details ready, see if you can manage the funds for the expenses or if you would can utilize revenue-based business financing to take care of the needs.

Keep in mind that it could take some time to generate a steady income, so taking cash out of personal resources to balance the business requirements might not be a good idea. Instead, it would be better if you consult with a financing company and explore the funding options for your business. Below are some of the common business startup costs that you should be aware of so that you can secure proper resources to meet them as applicable.

Equipment

The cost of equipment can vary greatly depending upon the type of your startup business. However, you can expect it to be somewhere around $10,000 at the minimum. The best option to deal with equipment cost is to avail an SBA loan or equipment financing.

Incorporation Fees

If you were planning to register your company to make it a corporate entity, you would need to follow the legal process to apply for the federal and/or state licensing or permits. This can incur incorporation costs anywhere between $50 and $300, depending upon the state’s laws and regulations.

Office Space

You can start small and rent an office space instead of buying a property to run your business initially. However, as you would need to spend a fixed amount per month to pay the rent, you should have a reliable resource to meet that requirement. Note that this can range from $100 to $1000 for each employee per month depending on the location and type of office space.

Inventory

If you were planning to start a wholesale, retail, distribution, or manufacturing business, you should have a clear idea of the inventory costs. It is advised not to stock too many products to start, but keep it good enough to meet your customer demands. You might need around 25% of the startup budget for inventory alone, which is why availing a separate inventory financing might be a good idea here.

Office Furniture 

If you were planning to start a services company that needs a typical 9 to 5 office environment, you would need furniture, such as desk and chair, for each of your employees, as well as furniture in the reception area. Although this would vary greatly depending upon the number of employees you are planning to hire, it is an important part of the business startup costs and should not be ignored at all.

Marketing

Promoting your business is quite simple these days with online marketing tools and social media. However, you might still need to spend around $100 to $250 per month on paid advertisements. Besides, you should also consider the costs of marketing materials like signboards and business cards when drafting the business plan.

Office Supplies

Office supplies such as computers, phone, filing cabinets, paper, and printer ink, etc., should also be included in the business startup budget. Although these seem to be minor expenses, the accumulated costs of office supplies can go anywhere from $100 to $1000. Usually, this would be around 10% of your total startup costs, but that would depend upon the number of staffs as well.

Utilities

No matter whether you own the building, or are operating from a rented space, you would need to pay the electricity, water, internet, and phone bills every month. You can estimate the cost of utilities based on the total area of your office space (excluding the internet and phone charges) at $2 per sq. ft.

Payroll

It might take some time to start generating revenue from the business. However, you should always have the proper resources to manage employee payroll from day one. Although the costs are based on the number of workers here, it usually comes around 25% of the total business startup budget.

Insurance

It is very important to protect your company with insurance. This would ensure that you do not have to face any great losses in case of an unfortunate event. The cost of insurance would depend upon the type of insurance you choose as well as the size of your business.

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Banks

Approaching a bank for a small business loan can work best when you can provide collateral. In addition to the funding options like term loans and lines of credit, a bank can also offer you commercial mortgage financing to buy or rent properties. However, you would need a good credit score to secure a loan from a bank. The cash flow would also be slower here, as banks usually release funds on a periodic basis. Note that small businesses generally find it very difficult to get a loan approved by banks because of lower sales volume and poor cash reserves.

Microlenders

Microlending can be the best alternative when you cannot secure a traditional loan from mainstream banks due to bad credit, lack of collateral, or low-rated company profile. Microlenders are non-profit institutions that lend short-term loans to small businesses, typically in the range below $35,000. However, the annual percentage rate or the total borrowing cost can be a bit higher in microlending when compared to bank loans. Besides, you would also need to provide a detailed business plan as well as financial statements for loan approval. Some lenders might also require you to give an explanation of how the funds will be used. All these can make approval of the loan a lengthier process.

Online Financing

Online lending can work the best for you when you do not have collateral but need the funding to be approved quickly. Online lenders can offer different types of loans up to $500,000, which can be great for small businesses to get going with their business ventures. The annual percentage rate can vary considerably here though, depending on factors like the type, size, and duration of the loan, as well as your credit history. The total borrowing cost can also vary from lender to lender, and some may require you to offer collateral as well. Regardless, the approval rates are much higher in online lending, and the funding is released much faster when compared to other types of small business financing.

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Loan vs. Mortgage

Small businesses looking to secure funds for various business needs such as purchasing equipment, managing inventory, buying a property, or running their daily operational costs can go for a business loan. Some lending institutions might require the loan to be secured against collateral, but it is not always mandatory, and the terms and conditions can vary from lender to lender. Such a funding option can be very beneficial in order to cover any type of unexpected expenses.

Mortgage loans, on the contrary, are required to be secured against any commercial property. The ownership of the property would remain with the borrower, but he/she would have to agree to repay the loan amount in regular installments until the term is completed. Besides, a mortgage loan is approved only if the lender finds the borrower credit-worthy enough to repay the loan, and the property value good enough to cover the amount.

Purpose and Types

A business loan usually opts for the expansion of the business. The borrower does not necessarily need to secure the loan amount with any type of commercial property, especially if approaching online lending for the funds. The loan can be long term, short term, secured, or unsecured. No matter what the type of loan is, online financing would get approved very quickly and can be used for any and all needs of the business.

A mortgage usually opts when a small business wants to acquire, refinance, or redevelop a commercial property such as an office building, a warehouse, a shopping center, etc. Typically, the loan amount would be based on the value of the property put as collateral, with most lenders offering a loan amount that is lesser than the property value. Mortgages can be fixed-rate, adjustable, and reverse type, which need to be secured with collateral.

Rate of Interest

An unsecured business loan can bring into play higher rates of interest when compared to a mortgage loan. That is because it is considered to have a higher risk when the funds are not secured with collateral. Besides, the borrower would need to have a reliable financial history to get the loan approved. Mortgages, as said, would be based upon the value of the property, and if the borrower fails to repay the loan amount, the lender would seize the commercial property put as collateral to settle the funds.

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• Managing Receivables – Receivables refer to the amount you are owed for providing your services. Usually, new businesses fail to manage their outstanding receivables, which in turn lead to a shortage of income to run their daily operations. It is reported that about one-third of the small businesses in the US go on with roughly around $15,000 in outstanding receivables.
• Managing Payables – Although the advance payment method helps businesses to charge for their services beforehand, it can take a long time to actually get the invoice paid and process it for their daily operations. Around 60% to 70% small businesses reported that it takes about 25 to 30 days to receive payments after issuing the invoices to their customers, while they still have to pay to their suppliers to ensure smooth business operations.
• Managing Employees – Even though the income of the business is affected due to late payments and outstanding receivables, the company cannot delay employee remuneration. However, most small businesses find it very difficult to pay their employees on the assigned payday because of the lack of cash flow. When employees are not paid on time, the company might not be able to retain the required workforce for daily operations.

Resolving Cash Flow Challenges

Monitoring the payments and receivables on a weekly basis is the best way to keep track of the cash flow. Nonetheless, as these can be sometimes out of the control of the business owner, it is always better to seek out practical funding options to manage the cash flow troubles. For instance, availing a short-term loan from online lenders can be of great help in such scenarios. They release the loan amount very quickly that you can use to fulfill your business’ financial requirements. At the same time, continue keeping an eye on your outstanding receivables and follow up on the invoices promptly. This way, you can repay the loan amount without any hassles.

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Most banks and independent lending bodies offer commercial real estate loans to businesses after analyzing the potential risk factors and credibility of the borrower. Note that the terms and conditions in this type of business funding can vary from lender to lender. The loan period for commercial property loans typically ranges from 5 years (or even less) to 20 years, while the amortization interval can be longer than the loan term. For instance, if a borrower applies for a commercial real estate loan for 5 years with an amortization term of 15 years, he/she would be required to pay monthly installments in the 5 years period that equals the amount as if the loan was to be repaid over 15 years. This is followed by a final lump sum payment to repay the balance loan amount.

Lending institutions mainly consider the value of the property put as collateral as well as the credibility of the borrower to approve the loan. Some banks and online lenders might also require the borrower to submit financial statements and income tax returns for the past 3 to 5 years, as well as a description of their loan-to-value ratio and/or debt-service coverage ratio.

Types of Commercial Real Estate Loans

There are different types of commercial real estate loans aimed at the different needs of businesses. The most common types of business financing include:

• Permanent Loans: These work like basic mortgage loans for a commercial property. Permanent loans usually have a five-year term and can feature a longer amortization period.
• SBA Loans: These loans are guaranteed by the Small Business Administration (SBA), which means there is often less risk for the lender. However, getting approval for an SBA loan can be a lengthier process.

Bridge Loans: These are short-term mortgage loans, which usually go from a 6-month term to 3 years. Bridge loans can benefit businesses that require some quick funding to resolve their immediate financial needs.

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Below are some of the most common financial mistakes that startups make, which you can easily avoid to ensure that your business blooms to its greatest potential.

Not Having an Investment Strategy

It is very important to have an investment strategy planned so that you can allocate the funds for your business growth in time. You can apply for a business credit card to manage the small inward expenses, while an SBA loan would be especially helpful when you plan to lease business equipment or expand your business operations. Just make sure that the repayments are done in due time so that you do not accrue any unwanted interest amount.

Not Managing Personal and Business Accounts Separately

Using personal accounts for the business expenses is the silliest decision one can make. Although it might seem simpler at first, because you are the owner of the business, it would eventually make it very difficult to figure out which expenses were made for your business needs. Besides, keeping the accounts separate is also vital for filing your taxes properly and steer clear of any unwanted IRS penalties.

Not Including Own Remuneration

It is seen that most of the new entrepreneurs leave out their own salary when planning the initial budget. They think that it would help them in saving maximum funds for the other expenses of the business. However, this is an amateurish strategy – you would surely need some income after a couple of months, and if you tried to take that out of the allocated funds for your business without planning it beforehand, it will surely blow out the resources in no time.

Not Investing the Profits Back into the Business

It is seen that most startups fail because they do not have a reinvestment plan either. When the profits increase as the business starts to grow, first-time entrepreneurs forget the need to keep on investing for the future and look to take the extra income home. This is another silly mistake instead of taking more of the profits for self, reinvesting it into the business would surely help to reap more in the long run.

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Hiring a Bookkeeper

A bookkeeper can help you to save time and money, as well as guide you on how to file your taxes. They can identify potential errors in managing and categorizing your asset purchases in time, which can be helpful to avoid incorrect reporting while filing your tax return. Besides, having a bookkeeper on your payroll means you do not have to manage your books on your own, but can spend that time saved on other business roles.

Hiring a bookkeeper has a few downsides to it as well. Firstly, their services are not free of cost; you will have to pay them a fixed salary or as per the contractual terms. Note that their costs are likely to be more if they have more experience in the field. Although it will pay off in the long term, you need to decide how much you can afford for having a bookkeeper to manage your books at present.

Another drawback of hiring a bookkeeper is that you will also need to purchase accounting software. If you are already using one, you might need to train them on using the software if they are not familiar with it. In addition, you are also giving control of your business’ finances to a stranger here, which can be risky at times.

Hiring an Accountant

An accountant can help you to save time and money, as well as guide you in making strategic financial decisions as required. Accountants are experienced in identifying errors in categorizing and managing assets purchases very quickly, which can help to avoid mistakes while filing your tax return and inviting unwanted penalties. If you hire a licensed Certified Public Accountant (CPA), they can also help you to understand the areas where you need to invest and where you do not need to spend anymore. This can effectively help in your business growth.

The main downside to hiring an accountant is that you might end up relying on them too much. Although accountants can help to create a financial forecast to assess the potential risks and gains when planning an expansion, they are not perfect and can make mistakes too. If you rely too much on the accountant and distance yourself from managing the financial side of your business, you could end up losing capital as well. The best way to address this is by scheduling monthly meet-ups with your accountant and review the financial reports carefully.

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A startup business might need to source finances to meet its operational costs, while an already established company might need a loan or line of credit to ease its financial burdens, especially in case there is a delay in the payments receivable. Usually, a lending institution offers asset-based financing as the best alternative when a company is unable to show enough cash assets or cash flow to acquire an unsecured loan. This way, the lender can approve the funds based on the physical assets of the company as collateral.

Note that the terms and conditions of equipment secured lending depend on the value of the asset as well as the type of equipment presented as collateral. Generally, lending institutions prefer liquid-type collateral, such as securities and bonds, which can be readily converted to cash if the company fails to repay the loan in time. Financing on physical assets is usually considered to be riskier, which is why the loan amount may be much lower than the actual value of the equipment. Still, that can be a good option for businesses, which are looking to expand their operations, because they are more likely to be in a solid position to repay the amount as agreed.

The interest rates on equipment secured lending are also much lower than that on an unsecured loan or line of credit. This is because the lending body can recover most of the losses here if the borrowing company fails to meet the repayment terms. Yet again, the interest rates can vary widely depending upon the credit history of the company, the business cash flow, as well as the length of the loan period.

Small and medium scale companies with stable revenue and good value physical assets are the ones who generally go for asset-based lending. However, it can be an excellent option for large corporations as well to cover their short-term financial needs occasionally, such as for managing their employee salaries or for some extra raw material purchase.

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