- To acquire real estate or a business
Commercial lending is one of the most important yet least understood ways to get a business off the ground.
While many people save and try to invest their own money when they start a business, this is rarely the best way to get off the ground. If for any reason at all the business goes sour, you could end up losing your entire savings. Plus if you take out personal loans to finance the business you could see your credit rating destroyed. With a poor credit rating it will be nearly impossible for you to get a good mortgage, acquire credit cards or have any way to deal with financial emergencies.
You can often use leasing in order to finance the equipment your business needs to survive, but in many cases you will need a mortgage if you are trying to acquire property or an existing business. That is when commercial financing comes in handy.
When you take out a commercial loan, however, the loan is in the name of your business. Should things go wrong it is only the business that will suffer. You can always start a new fresh business. You can’t recover from the damage a personal loan can cause your own to financial reputation.
The Different Types of Commercial Loans
It is important to know the different types of commercial loans available. In this summary we will try to give you a good feel for the common loan terms so that you can be an educated consumer. Most of these terms assume that you are purchasing real estate or an existing business.
Acquisition – An acquisition loan is used to acquire commercial property using the proceeds of the loan. This can include improved lots to already constructed and operating property.
Acquisition and Development – These types of loans are used to purchase and develop real property so that it increases in value. In other words you purchase a vacant lot and then build a house on top of it.
Asset based – This type of loan is when collateral and other assets are put up for security. If you default you lose your collateral.
Bridge Loan – A bridge loan is a loan that is used for a short duration of time until permanent financing is put in place. Bridge loans are a perfect solution to a timely acquisition or business opportunity because they allow a purchaser or investor to act quickly. These loans can be used for acquisition, buy-outs, foreclosures, cash out and construction purposes.
Construction – A construction loan is a loan used to construct a building or other improvements of real property, with the land and improvements as collateral for the loan. Construction reserve accounts are generally maintained to disburse the money as the construction progresses.
Mezzanine – A mezzanine loan is a loan that is subordinate to a primary lender. It involves debt paid back at the time of sale or refinance with an equity ownership piece given to the lender as an incentive. Loans on the property or the business with equity in either ownership or warrants in the company are used to buy valuable property or business or buy out an existing partner.