Top 7 Funding Options for Commercial Real Estate


There are various needs for financing commercial real estate which range from renovating, leasing or outright buying commercial property. Each of the financing options has its own attributes in terms of commitment and of one-time outgo of money. Care must be taken in choosing the right option. If you are seeking financing for a commercial real estate project, you can consider one of the following options:

You are reading: Top 7 Funding Options for Commercial Real Estate

1 Mortgage Loan for Commercial Real Estate

This is one of the most common financing options for commercial real estate and is usually disbursed by a bank. You must look and compare the interest rate that will be charged by various banks and then choose the right offering. In addition to interest rate, there are some of the other aspects also that you must consider.  One of them is loan-to-value ratio. This is the part of the value of the property that the bank will finance. Banks can finance 75-100 percent of the value of the property depending on factors like location, resale ability of the property and the general condition of the property. If the bank is not financing the whole of the value, the shortfall will have to be met by you. A higher loan-to-value- ratio is desirable since it leaves you with more money in hands for investment in growth or even cash shortage.

Another aspect is the Amortization period, or the period over which the mortgage will be repaid to the bank. The Amortisation period is usually 10-25 years in commercial property and the longer the amortization period, the more money will remain in your hands for investing in growth.

Another aspect can be a certain Flexibility that the bank may offer in terms of repayment.  The financing bank can give 1-2 years of holiday on repayment of principal amount immediately after the loan is availed. This may help you in better dealing with the move to buy commercial property.  The bank can sometimes give additional money, usually a small fraction of the overall loan, for renovation if the value of the property increased by the intended renovation. It can be used to make the new premises environment friendly.

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2 Working Capital Loan

Working Capital Loans are given by banks and NBFCs for short durations like 5 years and can be used by you for investment in growth of the company including purchasing real estate. For example, if your business is moving to a larger space, there can be a sudden requirement of funds for the new premises and working capital loan can be taken for the purpose. Moving to a new, especially larger, premises can sometimes put severe drain of the working capital of your company. Such a loan can also be used for making some renovation and doing a retrofit for making the premises a green space.

3 Leasehold Improvement Loan

As the name suggests, a leasehold improvement loan is meant for making renovations and improvement to a property and is usually taken for a short duration like 5 years. If the value of the improvement that you are intending to make is in accordance of the bank’s view, the bank may even accept the improvement as the collateral for the leasehold improvement loan. This means that the rate of interest will be lower for you as compared to an unsecured loan. You can even get a holiday for about 6 months or so towards repayment of the principal amount.

4 Equipment Loan

An equipment loan can be availed if you are planning to purchase equipment for a new premises. The equipment itself acts as the security of the loan. The term of repayment is usually the life of the equipment which usually ranges from 5-12 years. You can save in upfront huge money outgo in purchasing an expensive equipment and can spread the outgo over a considerable period of time. Another advantage for you is that this type of loan requires less documentation as compared to other forms of loans.

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5 Demand Loan

A demand loan can be taken by you for immediate requirements of your business which may include making renovations to the premises and has no maturity date. The loan can be repaid by you depending on your own financial condition and hence there is lot of flexibility in this kind of loan.  It can also be used to buy equipment when moving to a new premises. If you are availing Demand Loan, you may be required to repay in full at any time as asked by the lender. You may also repay the entire amount as and when possible for you without any penalty. It has advantages for both the lender as well as you. The lender has the flexibility to ask for repayment whenever it requires and you can repay in part or in full whenever you want without having to pay any penalty. Demand Loans are used by business for bridge financing also.

6 Line of Credit

This type of loan can be taken quickly in case of sudden requirement of money for making renovations. There is usually lot of flexibility in repayment and other aspects in this kind of loan.

7 Vendor Financing

In certain situation, the seller of the property may provide Vendor Financing to the buyer of the property to see that the sale of the property happens. Vendor Financing is not very common.

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Category: Lifestyle

Debora Berti

Università degli Studi di Firenze, IT

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