Every business owner understands the importance of growth. When a business is reaching new heights, it requires an expansion to incorporate betterment options. For a clothes manufacturer, once their business is set and soaring, they often look for having their own stores and warehouses. These commercial properties are a necessity. While successful businesses often acquire these commercial plots with cash, startups or small businesses need to opt for commercial property loans to expand their business. Even large business houses are also buying a property with commercial property loans and they have such assets to access the best finances from leading banks.
What are Commercial Property Loans?
As mentioned above, commercial property loans enable an individual or a business to set up or lease additional space for commercial use. It can mean space for a new office, space for a store or expansion of the current manufacturing unit. People may think that a commercial property loan will be like any other property loan, but they are not the same. While both residential and commercial property loans deal with land, but their purpose for buying land is different. You cannot use your residential property for commercial purposes.
When a business or professional individual apply for a commercial property loan, they can,
- Lease new space
- Renovate or expand their current commercial space
- Shifting their business center
- Opt for legal aid to help them understand the terms and conditions better
With a residential property loan, a person can only purchase land or buy an apartment/house for their personal use. They cannot run any business on their residential property.
Differences between residential loans and Commercial Property Loans:
There are a few key differences between residential loans and Commercial Property Loans such as,
- Lower loan to value – in the case of residential property, the borrower can acquire about 80% of the total property valuation amount and the rest 20% needs to be paid in cash as a down payment. This ratio lessens to 55% in the case of a commercial property loan.
- Higher processing fee – as compared to residential loans, the processing fee required for commercial property loans which can be more than 1% of the entire loan amount.
- Higher interest rate – just like processing fees, the interest rate on the loan amount for a commercial loan is much higher than that for residential loans.
- The tenor is less – while a person can opt for a maximum of 30 years for the repayment of the residential loan, but commercial property loans need to be settled within 10 years. Even, you can also make part payment to reduce your principal loan amount.
- Technical approval – when it comes to commercial loans, the chance of acquiring an older property becomes lower. This is because the older buildings do not meet the technical regulations meaning that they are a liability which banks will not be confident about.
This complete ownership plays a major role when it comes to individuals who are just starting out. Many businesses opt for joint ventures to meet up the purchase price and the loan is generally paid by their company. But in times of dispute, the main company has the most at risk. When companies apply for commercial property loans without any partners, they can avoid such hassles.
When an individual or a company applies for commercial property loans they need to keep in mind that the bank will always keep its interest in mind. Yet, the investment turns out to be fruitful as with the expansion the business will be able to branch out more and increase their profits. If the company is sure of its profit then they can apply for this loan.