Do you own a small business? Are you looking to open a small shop or store? Generally, a limited or incorporated company requires a bit of money in order to put an open sign up. The best way to get the funds needed is to talk to a financial advisor about a commercial mortgage.
A commercial mortgage is for businesses or investors seeking to purchase properties that will produce income. For example, this includes spaces like a retail area, restaurant, or industrial shops. So how does a small business owner go about getting approved for a commercial mortgage? Check out these steps to get the right mortgage for you.
1. What you need to bring to the branch
Getting a commercial mortgage
is a bit more of a process than a home loan. The risk for lenders is substantially higher due to the uncertainty that your business will drive enough revenue and that you are able to deliver on several key factors.
Firstly, lenders will want to see a certain amount of cash handy to cover the loan payments. Secondly, they need proof that your business is running and generating a profit. Since a company is different from a home mortgage, you’ll need a larger down payment. However, this does depend on whether the property is partially or completely commercial zoned.
If a unit is partially zoned, that means residential rental units are present in addition to commercial zoning. A property has total commercial zoning when there are no residential units available and the dedicated space is for commercial business only. Depending on whether a property is partial or total commercial zoning, you may need to put up to a 50% down payment for the location. Knowing what kind of zoning you are looking for beforehand when applying for a commercial mortgage will speed up the process.
2. Find out the type of commercial mortgage you want
Understanding what type of commercial mortgage you are applying for will determine the lending rate. Lending rates vary by determining the “loan to the value” rate of the business. For example, an office commercial mortgage will have a higher lending rate than farmland. One of the highest lending rates offered is for a multi-family resident of 5 or more units—conversely, farmland or storefront will be substantially cheaper. Make sure you’re aware of the type of mortgage you are looking for to avoid unforeseen costs and payments.
3. Expect to wait and negotiate
The time it takes to apply and get approved for a home mortgage is substantially less than applying for a commercial mortgage. It can take quite a few months to be fully approved.
In Canada, lenders can set their terms and conditions when loaning money for a business. Lenders have their own criteria that determine the risk when applying. Understand that the requirements are generally based around the lender seeing the business’s profitability. Be prepared to sit down and negotiate your terms with a lender to get the best mortgage for you.
4. Be aware of the applicable fees and insurance
Understand that lenders will generally charge a fee that could be a few thousand dollars. You’ll also have to put a down payment on insurance so that you are adequately protected.
The main reason for applying with business insurance in hand is to reassure the lender that if you cannot make your mortgage payment on time you won’t default on your payments and can still ensure they go through.
This also has the perk of helping your commercial mortgage lender feel more confident that will always receive payment on time and help you get a better mortgage.
Applying for a business mortgage is a longer process than getting a residential one, but it can result in even greater growth for your business.