Having your own firm can allow you to control and modify its operations more freely, as well as earn money. However, there is risk associated with commercial mortgages, so it's critical to weigh the benefits and drawbacks of property ownership.

Although the idea of a home mortgage is probably familiar to you, residential and commercial mortgages differ significantly in a few key ways.

Many of these variations, according to Kevin Kelley, a senior account manager at Commercial Lending USA, can be attributed to the higher risk associated with commercial mortgages for both lenders and borrowers. These loans typically have higher interest rates and additional costs as a result.

Commercial mortgages are riskier, in part because it may be more difficult to dispose of the property. According to Kelley, "a commercial building can be very specific to a business and what it needs."

Compared to residential mortgages, commercial mortgages often have shorter payback terms and lower loan-to-value ratios. This implies that a bank will probably anticipate a larger down payment as a percentage of the property value. Additionally, they'll anticipate that you'll pay off the loan sum faster than a homeowner would.

Why think about getting a business loan?

There are several reasons why purchasing commercial real estate can be a wise decision.

You're dealing with limitations set by your landlord or significant rent increases.

Purchasing might free up operating capital when commercial real estate costs are high because it lowers your monthly rent payments.

You wish to increase your personal wealth by using your business property.

When the value of your commercial real estate increases, owning it might help you accumulate equity.

Your property needs to be outfitted for a very specific use.

The typical landlord is not going to cover the costs of specialized construction that is required for manufacturing or scientific research. Furthermore, after you depart, they anticipate that you will pay to reverse those modifications.

You've located the ideal site for your next venture.

A number of factors, including its size, facilities, foot traffic, equipment, and accessibility to important suppliers, may make it appealing to different businesses. Purchasing the land and making improvements there can provide an extra source of income.

Pride of ownership can also be a driving force for buyers, according to Kelley, who may want to make improvements, repairs, and investments in their property that would be unnecessary if they were renting.

What is the required down payment amount for a commercial property?

You will pay less interest over the course of the loan if you make larger down payments, which will reduce the amount you need to borrow. Placing down as much as you can afford is a smart move, particularly when interest rates are rising.

But if you want to put down the minimum (to free up working capital), you'll probably need to put down 20% or more of the purchase price. Depending on the lender, your company's financial situation, and the building you're trying to buy, this amount could be higher or lower.

The loan-to-value ratio, which establishes the maximum amount of a secured loan based on the market worth of the asset pledged as collateral, is strongly tied to the size of the down payment needed.

How long does a business mortgage last?

Commercial mortgages are typically paid back in equal installments during an amortization term of 20 years or less. Lenders like Commercial Lending USA can provide extended amortization periods to firms in order to safeguard their cash flow.

What interest rates are typical in the United States for a commercial mortgage?

Similar to residential mortgages, business mortgage interest rates fluctuate in response to changes in the economy. However, as banks charge higher rates to borrowers they consider to be riskier, your company's financial standing also plays a role in determining the rate you will be given.

Rates and mortgage terms are related, just like with residential mortgages. The period of time your mortgage is in force is known as the mortgage term.

"All banks will offer fixed rates, usually from one to ten years," claims Kelley.

In an effort to control inflation, the Bank of America usually raises interest rates.

Many people will say, "Let's see what happens," when rates rise. We'll use a two-year fixed rate for the time being.

How to figure out the payment on a business mortgage

Principal and interest will be paid each month, just like with a home mortgage. Your principle is equal to the sum of the loan amount and the number of months in your payback period. According to Kelley, you may calculate the monthly interest rate for the interest part by dividing the annual interest rate by 12. To get the monthly amount, add the principal and interest.

The majority of people use an online mortgage calculator. These can also assist you in assessing different scenarios and determining the quantity of mortgage your company can afford.

Calculator for commercial mortgages

Get a monthly amortization schedule and determine the costs of a business mortgage with this tool.

All you have to do is type in the loan amount, the interest rate you agreed upon (or will pay), and the term length (in months). You can use the calculator to find out how much interest you will pay overall as well as how much your monthly payments will be.

Does a commercial property qualify for a residential mortgage, and vice versa?

Banks will not permit you to purchase a business property with a residential mortgage. However, you might be able to finance your commercial property using a home equity line of credit, provided you have a sizable down payment (40% to 50% of the purchase price) on your property.

Though it wouldn't be beneficial, you could conceivably use a commercial mortgage to purchase a residential home. You would probably have to make a bigger down payment and deal with excessively higher interest rates and costs.

What dangers come with getting a business mortgage?

There may be terms and expenses associated with commercial real estate loans that you are unfamiliar with.

For instance, there are recurring annual fees that might add up in addition to the initial application price. They can be anything from 0.5% to 1% of the loan amount and are typically included as a percentage.

Fees for surveys, legal work, and appraisals could also apply. Prepayment limitations or penalties for settling a debt ahead of schedule may also apply to commercial mortgages.

According to Kelley, it's critical to go over the fine text of your contract "word for word." For instance, a lot of business mortgages are actually loans; therefore, the lender has the right to demand repayment at any moment. Even though banks don't call in loans very often, it has happened in the past, most notably during the financial crisis of 2008–2009. You would need to know that you can quickly secure alternative financing in order to be ready for such an occasion.

The steps you must take in order to be eligible for a business mortgage

In the event that you choose to pursue a commercial mortgage, be sure to maintain your financial statements in the best possible order by having a chartered professional accountant (CPA) produce them annually. Typically, an underwriter will prioritize them while assessing larger business loans.

According to Kelley, "the underwriter needs to build a case for the loan." The question they have is: How are you going to repay this? You can find the answer to that in your financial statements.

Even if your company has been operating for a longer period of time, you will still be regarded as a start-up until you have two years' worth of documented financial records. That implies that you'll find it more difficult to obtain credit, have less access to finances, and potentially pay a higher interest rate,” says Kelley. She also advises getting incorporated as soon as possible to obtain those Year 2 financials.

Finally, Kelley advises not to let your business taxes fall behind.

Learn more about mortgages for businesses. For information on whether and how to purchase a property for your company, including how to arrange financing, see our Guide to Purchasing Commercial Real Estate. When you're prepared to move forward after finding a property, learn how to successfully negotiate the purchase of commercial real estate.