Commercial loans are obtained for many different business ventures. For this reason there are different types of commercial finance. They in general, is for the purchase of property. It is like a loan to buy a home. The property becomes the collateral to secure the loan. Upon the pay off of the loan the business owner will then own the property. Additionally, like a home loan, a business owner can use the equity in their property to get future loans.
The first type of commercial finance is called an owner-user loan. This type of finance would be for property that will be used to conduct business. Some examples include a doctor buying a building to house his practice or a bookstore owner buying a building from which to conduct their business. Most of these are start up for a business just starting. One issue with these loans is that since the business is just starting there is no record of the business dealings. The bank will use the business owner's personal credit to qualify them for the loan.
The second type of commercial finance is an investment property loan. This type is used for businesses where the actual property will be used to make the revenue for the business. Some examples are a building which will house a shopping mall or an apartment building. Many of these loans are start up loans, like with the owner-user loans, so again the lender will base their decision upon the business owners personal credit. However, many of these loans are for business owners that own a chain of buildings all operating the same basic business. In this case the business would be established and the loan could be done under the business name.
The last type is a hard money loan. These loans are for development projects. Some examples are older buildings bought for rehab or a group of houses bought to convert into apartments. These types of loans are often given to development or building companies. These companies fix up the properties and then resell them. These loans usually are set up to avoid early payoff fees and other fees associated with paying off a loan early. The banks enforce these fees so they do not lose out on making the interest money they would should the loan be paid for the full term.
Whatever type of commercial loan a business owner is taking out, they should go to the lender prepared. They should understand the basics of the type of loan they are wanting so they can properly be prepared to negotiate terms. They will also be able to look over the terms and make an informed decision about it.
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