For most successful companies, there will come a time in their commercial life when their current premises act as a constraint. There is little space for more equipment and new employees, making it difficult to accommodate a rising number of customers. As such, expansion becomes necessary for continuing growth.
Although a requirement for enabling growth, expanding a company is easier said than done. Most opt to purchase commercial property, either in the form of existing commercial buildings or land to be developed. Naturally, these purchases can be quite costly, raising the question of how these purchases can be financed. In this article, we will discuss how commercial finance can be used to expand your business, and how it can be obtained. Let’s get started.
What is commercial property finance?
Commercial property finance is one of the most common tools for expanding a business. It is a form of finance that caters specifically to the needs of businesses, enabling them to purchase commercial property for business use. This includes office space, industrial warehouses, retail storefronts, and other such properties.
As commercial property finance is an umbrella term, borrowers have a range of different loans to choose from. Each loan has its own set of advantages and disadvantages, making it best for some scenarios over others. That said, most commercial property finance loans are secured loans, meaning the borrower must be prepared to provide security. This security is most often the property in question, though other properties that satisfy certain requirements can also be used. If the borrower cannot repay the loan, the lender is entitled to seize the property as repayment. As such, commercial property finance can be quite a risky option for a poorly planned expansion project.
Types of commercial property finance
As commercial property finance is an umbrella term, there is a suite of different loans for a potential borrower to choose from. You’ll need to have a solid grasp of each one in order to choose the best loan for your situation. Selecting the right loan will ensure your project is properly funded, has enough flexibility to react to unseen events, and keeps risk fairly low. While not an exhaustive list, we have detailed some of the most popular and effective types of commercial property finance below.
Traditional bank loans
Bank loans are the most common type of commercial property finance. Although the most widely used, bank loans are also one of the most restrictive. Borrowers will need to satisfy several criteria in order to be considered for a loan. Having a good credit history, detailed and lengthy business accounts, and a substantial deposit are among the most important factors. For young businesses, these criteria can be difficult to meet.
Small business loans
Another often used type of commercial property finance is small business loans. While they don’t tend to come close to the amount of capital that a bank loan can raise, small business loans are much easier for young companies to apply for. As the name suggests, they are made specifically for small businesses, not requiring as storied an accounts history as bank loans. However, they do still require a healthy credit score for your application to be considered.
Also Read: Are Small Business Loans Considered Secured or Unsecured?
Bridging loans
If you are looking for a swift solution to your financial problems, then look no further than bridging loans. This type of commercial property finance offers a speedy solution to monetary problems, making cash available at short notice and over a short period of time. Bridging loans allow borrowers to seize upon opportunities spotted within the tumultuous property markets, ensuring great deals don’t pass you by. While this speed makes bridging loans excellent for property markets, it does come at a cost. Bridging loans are comparatively quite expensive, coming with high interest rates compared to other types of commercial property finance. Bridging loans are also another type of secured loan, requiring the use of collateral in order to obtain a loan. This forces borrowers to assume a higher level of risk, as defaulting on a bridging loan will enable lenders to repossess collateral assets as repayment.
Also Read: Pros and Cons of Bridging Loans
How does applying for commercial property finance work?
Applying for commercial property finance is considerably different to most other forms of finance. One of the most notable differences is that the borrower must have an established commercial entity, typically in the form of a Limited Liability Company (LLC). Borrowers can also obtain residential loans as normal. However, without a commercial entity, the reverse cannot be true. In addition to this requirement, borrowers must also intend to purchase commercial property with the loan, such as retail premises or warehouses. Borrowers must also put up property as collateral, as we mentioned.
Although the value of collateral assets and the commercial status of the borrower are among the most important factors, a commercial property finance lender will still consider your credit rating. A weak credit rating won’t have as disastrous an effect on your application’s success as it would with a bank loan, but it does still have value. A strong credit rating could be the difference between a successful application for commercial property finance and a failure.
The final main factor for a successful commercial property finance loan is property value. The property in question is most often the property used as collateral. As such, a lender will be very interested in the value and profitability of this property. Potential income will be rigorously assessed, whether you intend to renovate it and sell it on, or use it in your company’s operations. A property that indicates a strong revenue stream is more likely to result in a successful loan application.
Wrapping up
Commercial property finance can be an excellent method of raising finance to facilitate business growth. It offers a range of specialised methods of raising capital, ensuring your company can benefit from the best form of finance for its situation. However, commercial property finance does have its downsides. Most types of commercial property finance are expensive, and require collateral to have your application considered. As such, you’ll need to do significant research to ensure your expansion project is both thoroughly planned and profitable to offset the risk. In doing so, you can enjoy the unrivalled benefits of commercial property finance.