Acquiring property for your business is often a major step in expansion, adding long-term value and stability. However, buying property requires significant capital, which many business owners don’t have readily available. This is where business loans to buy property can be a valuable tool. Whether you’re looking to buy office space, warehouses, or other types of commercial property, these loans can equip you with the capital you need.
What Are Business Loans to Buy Property?
A business loan is a sum of money that is borrowed by a business or business owner and is typically used for operational expenses, expansion, or purchasing assets. Business loans can come from traditional banks, credit unions, or other financial institutions, and they are usually repaid with interest over a specific period.
Some business loans are specifically structured for real estate purchases, while others are more general in purpose but can still be applied toward buying property.
Can I Use a Business Loan to Buy Real Estate?
Yes, you can use a business loan to buy real estate, but not every type of loan is suitable for this purpose. Some loans, such as commercial real estate loans and certain SBA loans, are tailored for business owners who want to purchase property. Business owners might choose to buy real estate for several reasons:
- To house the operations of their company
- As an investment, generating rental income
- As an asset that appreciates over time
For example, if you're a small business owner who has been leasing office space and you want to buy your own building to save on long-term costs, a business loan could help finance that purchase. Business loans can cover the cost of purchasing an office building, a warehouse, or even a retail store.
When you apply for a business loan, lenders will assess several factors before granting a business loan for real estate. These include your creditworthiness, collateral, and business plan.
Creditworthiness
Your personal and business credit scores will play a crucial role in determining whether you qualify for a business loan and at what interest rate. If you plan to apply for loans in the future, it may be wise to improve your credit history as much as possible before you start the application process.
Collateral
Many business loans for real estate require the property itself to serve as collateral. In case of default, the lender can seize the property to recoup their losses. Without collateral, it may be difficult to qualify for a loan. Loans without collateral tend to have less favorable terms.
Business Plan
Lenders will want to see how the property purchase fits into your broader business plan, and they will evaluate whether your projected cash flow can support the loan payments. Before you apply for business loans, you should carefully develop a plan that shows how the real estate purchase will contribute to your business.
Commercial Real Estate Loans
One of the most common ways businesses finance property purchases is through commercial real estate loans. These loans are designed to provide funding for the purchase of commercial properties, including office buildings, retail spaces, and industrial warehouses.
Commercial real estate loans typically offer longer repayment terms than standard business loans, often ranging from 10 to 30 years. This can make the monthly payments more manageable for business owners
Interest rates may vary depending on the lender, the size of the loan, and the borrower’s creditworthiness. The primary advantage of using a commercial real estate loan is that it allows a business to purchase a significant asset with minimal upfront capital.
To qualify for a commercial real estate loan, business owners should:
- Have solid credit
- Present a business plan
- Provide financial statements that demonstrate the ability to make loan payments
In many cases, the property purchased with a commercial real estate loan will serve as collateral. If the borrower defaults, the lender has the right to seize the property.
Can an SBA Business Loan Be Used to Buy Property?
Yes, certain SBA (Small Business Administration) loans can be used to buy property. SBA loans are highly popular for small businesses because they may offer lower down payments, longer repayment terms, and more favorable interest rates compared to other business loans. SBA 504 loans and SBA 7(a) loans are commonly used for real estate purchases.
SBA 504 Loan
The SBA 504 Loan is designed for the purchase of fixed assets, including real estate. The loan program is ideal for businesses that want to buy a property for their own use. Here's how an SBA 504 loan typically works:
- The loan is provided by two entities: a Certified Development Company (CDC) and a private lender. The CDC covers up to 40% of the loan, while the private lender finances 50%.
- The business owner is required to make a down payment of only 10% of the total property cost.
- The loan can be used to purchase land or existing buildings, or to construct new facilities.
The long repayment terms (up to 25 years) and competitive interest rates make the SBA 504 loan an attractive option for small business owners who want to acquire property.
However, one condition of the SBA 504 loan is that the borrower must occupy at least 51% of the purchased property. This loan therefore may not be suitable for businesses who intend to rent out most or all of the property they purchase.
SBA 7(a) Loan
The SBA 7(a) Loan can be used for a variety of purposes, including purchasing real estate. It can be used to buy, renovate, or refinance commercial real estate. The SBA 7(a) loan offers the following benefits:
- Loan amounts of up to $5 million
- Repayment terms of up to 25 years for real estate
- Competitive interest rates
To qualify for an SBA 7(a) loan, businesses must meet the SBA’s size standards, demonstrate the ability to repay the loan, and show that they have a viable business plan.
How Financing Differs For Different Types of Property
Residential rental properties, such as single-family homes or small multi-family homes, are often financed through conventional mortgages, although some business loans can be used for this purpose. Commercial rental properties, on the other hand, typically require other types of financing, such as commercial real estate loans or SBA loans.
Residential Rental Property
For residential rental property, borrowers often use traditional home loans and investment property loans. Lenders may require a higher down payment and offer higher interest rates than for primary residences. Additionally, if you plan to purchase multiple residential rental properties, you may need to work with lenders specializing in real estate investments.
Commercial Rental Property
Commercial rental properties, such as office buildings, retail spaces, or large apartment complexes, typically require larger loans. These loans may have more stringent requirements, including higher down payments and shorter repayment terms, depending on the lender. When applying for financing for commercial rental properties, lenders will take into account the potential income generated from the property as well as the borrower’s financial strength.
Qualifying for a Business Loan to Buy Property
When it comes to qualifying for a business loan to purchase property, lenders will evaluate several key factors, such as your credit, business income, collateral, and down payment.
Credit Score
Lenders may evaluate both your business and personal credit scores. A high credit score can lead to better loan terms, including lower interest rates.
Business Income
Lenders will want to see that your business has sufficient revenue to cover loan payments in addition to other operating expenses. They will therefore analyze your business’s current and projected income.
Collateral
The property itself usually serves as collateral for the loan. In some cases, lenders may require additional collateral to secure the loan.
Down Payment
Depending on the type of loan, you may need to provide a down payment. SBA loans, for example, often require a 10% down payment. Loans specifically designed for investment properties tend to require higher down payments.
What Are the Risks of Using a Business Loan To Buy Property?
While using a business loan to buy property can offer advantages, such as building equity and potentially reducing long-term operational costs, there are also risks such as loan default, interest costs, and cash flow strain.
Loan Default
If your business faces financial challenges and you are unable to make the loan payments, you could lose the property, as it often serves as collateral. It’s therefore important to have emergency reserves set aside before you take out a loan.
Interest Costs
The longer the loan repayment term, the more interest you will end up paying over time. It's important to consider the total cost of the loan, not just the monthly payment. Businesses that can manage higher monthly payments may benefit in the long run from taking out a loan with a shorter repayment period.
Cash Flow Strain
Committing to a large loan payment can strain your business's cash flow, especially during times of economic uncertainty. Business owners should carefully evaluate their financial health and review all loan options before deciding to move forward.
We Can Help You Find Business Loans to Buy Property
If you’re looking to purchase real estate for your business, there are many business loans to buy property. Each loan type has its own unique criteria and benefits. To help you find the right lender, connect with us at BusinessLoans.com and answer a few questions about your business. With our experience and proprietary technology, we quickly connect business owners with the right lenders for their financing needs.
