The retail industry is growing. After 3.7% annual growth from 2010 to 2019, we saw 7% growth in 2020 and 14% in 2021. The National Retail Federation predicts 6%-8% growth in 2022, reflecting changes in consumer behavior. Small businesses with brick-and-mortar stores can gain market share as foot traffic in stores increases.
Some small businesses require commercial property to meet with customers. Cutting a customer’s hair in a barbershop makes more sense than performing the same service in your backyard. A commercial property promotes your brand and can make your company a fixture in the area. We’ll discuss how a small business real estate loan can help your business and how to get one.
What Is A Small Business Real Estate Loan?
A small business owner can use one of these loans to acquire a property. The borrower uses the property as collateral and must make monthly payments towards the debt.
Reasons to Seek a Small Business Real Estate Loan
A small business loan provides you with extra funds at the cost of additional debt. Small business owners should weigh their choices and how they would use the loan’s proceeds. A small business real estate loan can help your company if you use it for the following reasons.
Grow the Business
You may already have a commercial property for your business. However, some of your customers may have to drive an hour to arrive at your property. Some people will make that trek, but other prospects will seek closer alternatives. A commercial real estate loan helps you finance a second property. Small business owners can buy a property in a location with high demand.
Providing customers with multiple locations increases loyalty and helps you win additional local markets. Corporations like Starbucks invest in thousands of stores because the model works. Small business owners don’t have enough funds or demand to buy that many commercial real estate properties. Buying a second property in a strategic location can increase revenue.
Acquisition of New Business
Business acquisitions enable a company to quickly gain additional market share, resources, credibility, and skilled workers. Some businesses make several acquisitions to expand operations, but those acquisitions cost money. A small business real estate loan can help you acquire businesses and their assets, including brick-and-mortar stores.
Amazon’s acquisition of Whole Foods accelerated its entry into grocery shopping. Amazon didn’t have to build a brand from scratch and build social proof over time. Instead, the company piggybacked on Whole Foods’ locations, authority, resources, and workforce.
Not every small business has international ambitions. Some small business owners want to win in their local market. Acquisitions can lead to good synergies and take a competitor off the board.
Refinance an Existing Project (Cash Out)
Business owners build equity through the initial down payment and mortgage payments. Some business owners strive to become debt-free and eagerly await the day when they have full equity. Other small business owners use cash-out refinancing to stay in debt longer to tap into their equity.
A cash-out refinance occurs when a borrower takes out a larger loan. For example, let’s assume you owe $300,000 on your $1 million commercial property. You have $700,000 in equity you can tap into for other expenses. For a cash-out refinance, you can take out a $500,000 loan and use it to pay off your $300,000 debt.
You will still have debt after a cash-out refinance. However, you can cash out on the difference between your old and new loans. In the example, you turn a $300,000 debt into a $500,000 debt. This refinance provides an extra $200,000 that you can use in any way you desire.
Fund a Renovation Project
Commercial property renovations improve the property’s functionality and may open up extra space for customers. These renovations keep your property in good condition. Occasional renovations can protect you from significant property damage and higher costs in the future. Some small business owners don’t have enough funds to cover renovations. These owners can take out a loan to finance property renovations.
Finance Existing Business Loans
Interest rates vary, and you might have taken out your first loan when rates were high. Many real estate investors and business owners refinance their loans to capitalize on lower interest rates. Lower interest rates translate into lower monthly payments. Borrowers use the new business loan to pay off the old loan in full.
Some lenders let you change the length of the loan during a refinance. You can add additional years to your loan to decrease monthly payments. Borrowers who want to get out of debt sooner can deduct a year or more from their loans.
Small Business Real Estate Loan Financing Options
Small business owners have several choices to obtain loan financing. Learn about some of your options below.
SBA Backed Loans
The SBA offers several loans for small business owners. The SBA 504 and SBA 7(a) loan programs can provide enough capital to fund a real estate acquisition. Each loan has income requirements, and lenders will ask for financial documents.
Traditional Lenders and Banks
Traditional lenders and banks offer attractive terms and rates. However, these financial institutions are less inclined to take risks. They have stringent requirements to get a loan. Check their qualifications before applying.
Online Lenders
Online lenders can provide more attractive loans than traditional lenders and banks, and far sooner. You can apply for a loan anywhere instead of visiting a local branch.
Common Requirements to Get a Small Business Real Estate Loan
Each lender has different requirements, but some come up more often than others. If you want to get a loan, anticipate a lender asking about the following details.
Credit Score
Your business credit score measures your ability to manage debt. A higher credit score indicates you can comfortably pay off debt, making you an excellent candidate for a loan. Lenders will set a minimum credit score for their loans.
Personal and Financial Documents
Personal and financial documents help lenders gauge your company’s financial health. They will ask for many personal and financial documents, including but not limited to the following:
- Business plan
- Balance sheet
- Income projections
- Current cash flow and income
- Bank statements
- Personal and business tax returns
- Existing debts
Not every lender is the same. Some lenders may ask for little to no documentation, but these lenders often charge significantly higher APRs.
Monthly/Annual Revenue
Businesses will take a percentage of revenue and allocate it towards debt. High revenue with a good trajectory makes you more attractive to a lender. Lenders will assess your monthly revenue and obligations when deciding how much money they let you borrow.
Owned Real Estate Asset/Properties
Lenders will look at your real estate portfolio with two things in mind:
- What is your equity?
- How much do you pay each month?
High debt and little equity will hurt your chances of getting a loan. Lenders will worry about you taking on more than you can handle. They may also worry about how a slow year of business would impact your ability to cover loan repayments. However, if you’ve made significant progress paying down your properties, you’ll be in a better position.
Time In Business
Lenders value an experienced business owner who has an established company. More time in business means more decisions, adapting to numerous changes, and building a customer base. A small business owner’s experience can set themselves apart from startups.
Get A Small Business Real Estate Loan
A small business commercial real estate loan helps you buy commercial property and grow your business. Small business owners can obtain a loan through various financial institutions. However, traditional financing can delay the process. They also come with strict terms and stringent requirements.
