Investing in commercial real estate can provide a number of significant advantages to your business and investment portfolio, including protection against market volatility and numerous tax benefits. However, many businesses are not able to enter this market because of a lack of liquidity available to make the purchase. Nonetheless, with current commercial real estate loan rates hovering as low as 3.9 percent, making this type of purchase can lead to a greater degree of business savings. Understanding the options that are available to you can help you realize the economical advantages of making this type of investment.
Types of Commercial Loans
There are a number of different types of commercial loans that you may be able to tap into in order to make your commercial real estate purchase. Some of the most common include:
SBA 504 loans provide a long-term financing option for fixed assets. They are based on the 5- and 10-year treasury rates and usually offer the lowest interest rates possible for commercial real estate purchases, with rates currently as low as 3.91 percent. The average amount of this loan is $1 million, payable for a term up to 25 years. SBA 504 loans are currently being offered at average rates of 4.38 to 4.49 percent. They are backed by the lender and the Small Business Administration. The down payment is only 10 percent for borrowers of this loan. Because of their favorable terms, they are the most difficult type of loan to obtain.
This group of loans is also an attractive option for businesses that want to purchase a commercial building, finance construction or renovate a property. This loan type can also be used to make long-term equipment purchases, manage debt and fund working capital needs, so it is more flexible than the SBA 504 option. The average loan amount for an SBA 7(a) loan is $350,000 with a maximum repayment term of 25 years. Current average rates for this type of loan are 5.25 to 9.25 percent. The SBA imposes limits on how much interest can be charged on these loans, which are currently set at 7.75 to 10.25 percent. The SBA guarantees up to 85 percent of the value, so lenders have a high degree of security in these loans.
Many businesses may not qualify for the SBA loans due to stringent requirements but may still be eligible for a traditional bank loan. These loans generally start at 5 percent, but they can be much higher, depending on your particular credit situation. The amount of the loan is usually $25,000 or more. Loan requirements, rates and restrictions will vary by lender.
How These Loans Help Your Business Save
By being able to purchase your commercial property, you can avoid the expense of making commercial rent payments and shelter income through depreciation and reduced tax payments.