What are a commercial mortgage and its uses? Whether buying commercial real estate or expanding an existing business, a commercial mortgage is an answer.
Businesses large and small often require additional funding beyond what they have in cash. A commercial mortgage may be needed for any number of reasons, such as purchasing a commercial property, business expansion, or remodelling, to name a few.
What is a Commercial Mortgage?
If an individual or company wants to secure financing for business purposes, they can obtain this through a commercial mortgage. A commercial loan is simply a loan secured by a commercial building or some other form of commercial real estate. This property may already be owned by the individual or company seeking the loan or what the loan is meant to purchase. So if a person wanted to buy a hotel, for example, they could use the hotel itself as the collateral for the loan.
These forms of loans are used to acquire or even develop real estate, including the following:
- Hotels
- Convenience stores
- Retirement homes
- Shopping centres
- Office buildings
Commercial Lenders
Commercial lenders are the ones who make these types of loans. They can include commercial banks and some insurance companies. In addition, the Small Business Administration or SBA also provides commercial loans, which local or regional banks administer.
The qualification requirements for a commercial loan will vary between lenders. But in general, it’s the property itself that will be the most crucial factor, precisely the appraised value and its operating finances if it’s an active business such as a hotel. The borrower’s credit history and score are not often that important, but they may be checked and taken into account.
A person either can approach banks and other commercial lenders directly to inquire about loans, or they can work with a commercial mortgage broker. Brokers are experts at finding the best rates and lenders based on their clients’ needs. They can also be better at negotiating favourable rates and terms than the borrower.
Commercial Mortgage Lenders’ Documentation Requirements
Obtaining a business mortgage may be time consuming and difficult. However, regardless of whether an individual goes it alone or uses the services of a broker, they will need certain documents. These include:
- 3-5 Years of Financial Statements – The business’s income statements, profit and loss statements, and balance sheets.
- A business strategy is often necessary.
- Appraisal – a commercial property appraisal may be needed. The seller may already have one, so it’s best to check before paying for a new one.
- Environmental Study – this isn’t always required, but it may be for businesses such as gas stations and auto body shops.
Ultimately, either the lender or broker will inform the borrower what documents are needed. It’s best to attain these as quickly as possible to complete the commercial mortgage process. Keep in mind that some commercial loans such as those from the SBA can take months to close.