Types of Commercial Loans
Restaurant Loans, Construction Loans
Commercial Loan Types
Commercial loans are very different from residential loans. Residential loans deal with dwellings such as condos, and single family houses; but, commercial loans deal with loans for restaurants, multifamily homes, retail space, hospitals or a variety of other businesses and can get more technical. There are many types of commercial loans, these can be based on the type of business that you need a loan for or your specific financial needs; once you have a business plan in place you should contact a lender who specializes in commercial loans in order to discuss the loan options for your type of business. Below, you will find the different types of loans available; the benefits/disadvantages of each, as well as what options are available with these types of loans.
Get Funding to Start a Business!
Restaurant Loans
If you have ever wanted to start a restaurant or a cafe, you need to apply for a restaurant loan. A Start Up restaurant can be a successful business to start and can end up making you money over time, but to start them up, its quite expensive. The costs will depend from one restaurant to another depending on the location, the size, the type of the restaurant you want to open as well as interior furnishings, but overall, it can range from tens of thousands of dollars on up to millions of dollars. When it comes to most businesses, most people don’t have that type of cash upfront, so what they do is take advantage of one or more of the borrowing options available when it comes to starting a restaurant.
Costs Of A Restaurant
Starting a restaurant takes much money but maintaining it continually can also be a lot of money as well. You have to consider all the equipment you will have to buy, rent or lease, and then the staff you will have to hire – and paying them, getting them uniforms, licensing, obtaining contracts with food vendors, places for your patrons to sit, tables, new flooring, etc. Once you start to look at your list and go from top to bottom, you will begin to realize JUST how many things you will need, and it's somewhat astonishing and overwhelming, to say the least! Mostly you might start out with a small one-page list that could lead up to 6 pages; those expenses can add up quickly! You also need to consider other costs, not inside the restaurant; marketing, promotion, advertisements, you will need a social campaign which means you will also have to hire an SEO firm to do most of these things for you, business cards, even the sign outside that is above your business will cost you something!
Types Of Loans For Restaurants
If you want to be able to pay for all of these costly items, you will need to start looking into restaurant loans. Make sure that when you view each loan type, you look at all the aspects of the loan, including the fine print. Interest rates, for example, will vary so make sure you sit down with your financial adviser and your lawyer and look at every single loan type to decide which one would be best suited for your needs. The three top loan types for a restaurant investment are; Factoring, Equipment, and Restaurant-Specific Loans. Below, we will go over each one.
Factoring Loans:
A financial intermediary that purchases receivables from a company. A factor is essentially a funding source that agrees to pay the business the value of the invoice less a discount for commission and fees. The factor advances most of the invoiced amount to the company immediately and the balance upon receipt of funds from the invoiced party.
Equipment Loans:
Let's say that you don’t need capital for the business itself. You have everything you need for the building, BUT you don’t have enough money for equipment. It happens to some of the best restaurants out there and in many situations. An equipment loan will do exactly what it says it will do; it will help with equipment financing and give you the money to be able to lease, purchase or in some cases even rent equipment. A full-service kitchen deals with a lot of equipment, this cost alone could out beat the cost of the building itself. It depends on the kitchen itself. A full-service kitchen will need equipment such as:
- Commercial Convection Oven - $6,000
- Commercial Charbroiled - $5500
- Walk-In Refrigeration Unit - $6800
- Commercial Fryers - $14,000
- Commercial Open Burner/Griddle Top - $10,000
That alone was just five pieces of equipment which equal out over $40,000. Most start-ups do not have this type of money. So that’s where this loan comes into place.
Restaurant-Specific Loans
Usually, when it comes to restaurant loans they are offered by banks and other institutions. These are more like general business loans rather than being for something specific; as a restaurant. They are not bound by a specific need, but a more general need. When you use these types of loans, you can also use them for other things in the restaurant as well such as remodels, furnishings, carpet, tables, etc., The overall rate and loan term is going to be dependent on the size of the loan. So if you have a smaller loan, it will take less time to pay back. If you have a larger investment it will take more time to pay back!
Interest Rates For Restaurant Loans
Option 1: 6 Month Loans @ 1.25 factor rate. A loan offer for something like $10,000 where you have to pay back $12,500 in 6 months has a 78% interest rate. 1.25 is at the low end for some of these loans, but they can also be much higher as well.
Option 2: 1 Year loans for $10,000 have varying interest rates on different pay back amounts. For example, for $13,000 it’s a 57% interest rate. $14,000 is a 74% interest rate. $15,000 is a 91% interest rate.
Many of the loans and the interest rate percentage you will have to pay back, is going to depend solely on how good your credit is, as well as how long you need the loan and how quickly you think you can pay it back.
Construction Loans
When it comes to a construction loan, these are either obtained by the owner of the house or the home builder. Most of the time when it comes to a construction loan, they are based on a short term with the maximum output of one single year. They also have variable rates that move up or down depending on the prime rate. The overall rates on a loan such as this are much higher than that of a mortgage loan. To get a loan and get it approved the lender will (as always) need to see some plan such as a construction timetable, plans that detail everything that needs to be done, and, of course, a realistic budget that you would need to get the job done. In some cases, the lender also might ask for a story behind the loan.
After The Approval Process
Once you have been approved, the borrower will put a bank draft schedule that will show the various stages of the projects construction stages. Typically the payments for the interest will only be made during construction. When the funds are requested, the bank will send someone to check on the overall progression of the project.
SBA Construction and Business Loans
There are quite a few different loan types when it comes to commercial construction:
The SBA Loan for Commercial Construction Loans.
This is a loan type for small to mid-sized businesses looking to build owner occupied properties that are commercial in nature either from the ground up or in order to expand an existing facility. An Owner Occupied construction loan requires that your business occupies 60% or more of the new space or if it’s a pre-existing space, 51%.
100% Financing
100% financing is also available for established businesses for multi-use buildings such as dental practices, veterinarian practices/clinics, mini storage and self storage businesses and doctors offices.
10% Down Commercial Financing – 90% Loan To Cost
This is called a 504 construction loan and has quite a bit of leverage which will help you to maximize tax deductions and preserve your capital; it also helps to control any overhead expenses. A lot of businesses out there are very interested in conserving cash, so when it comes to a 504 you can keep more of the working capital than most of the other loan types out there. When it comes to the 504 Loan type you will be able to give in a down payment of 10% OR use the land you already own as equity.
The 504 Loan also offers you long-term amortizations – atypically 25 years for the first mortgage and 20 years for the second mortgage. The second mortgage is a "below market" fixed rate and there is no balloon or call provision on either loan. It is a "one and done" proposition - there is no "re-qualifying" later - allowing you to better control your overhead and plan for the future.
Small Grocery Stores Loans
It used to be that when a lender looked at a start-up such as a grocery store, it was pretty difficult for the owner to get a loan. See banks would often look at “holdings” of the products they were going to sell as a risk. Essentially one of the biggest issues was the thought of food spoiling or going out of date. Grocery stores also tend to have smaller profit margins, so this can make a lender a little wary. These days, though, things are much different. Most lenders see that this CAN be a profitable business, and it can be quite successful. Many banks will even offer much higher rates than they used to – up to $500,000!
How Do Grocery Store Loans Work?
One of the things you need to be aware of when it comes to a grocery store loan is that they differ from a traditional loan in a few different ways. First off, unlike a traditional loan, there are no bulk payments that are due at the end of the month. Secondly, this is all done electronically, so you can't accidentally miss a payment or worry about late fees. Lastly, Every time a sale is made in the store a portion of it is deducted from the sale of that item and it’s placed towards the paycheck of the loan. It's all very efficient!
What Stores Are Eligible For Grocery Store Loans
If you want your store to be eligible, you have to follow some or all of these guidelines depending on the lender. First off, the store cannot be brand new – or not even built yet; it has to be in business for at least three months. Secondly, over the past few months, you have been open; you have to have generated a consistent amount of money. If your business can offer both of these guidelines, then you have a pretty good chance of getting a grocery store loan.
Grocery Store Loan Types
There are quite a few different loans available for grocery stores and convenience stores; fixed, variable, or fixed to floating. Grocery stores can usually get interest rates that range between 4% and 9% across most types of financing available. However, the term and amortization is usually placed between five and 25 years. On the other hand when it comes to financing for things like machinery, equipment and real estate, you will usually receive terms between 15 and 25 years.
If you are using a loan for working capital and something like inventory, the loan could have a term of 5 to 10 years. There are various loan products to consider such as Conventional Loans, SBA Loans (504 and 7A ((For the SBA 7a product, loan pricing can be valued using the Prime lending index plus a maximum spread of 2.75%.)), Asset Based Lines Of Credit, Unsecured Lines Of Credit, Merchant Credit and Seller Carry Financing.
Salon and Spa Loans
Over the past few years, the economy has been turned upside down. But, even before then, it was very hard for a salon or a spa to receive a loan or any financing for that matter. A lot of the lenders and banks would turn down businesses such as this because it's considered to be a high-risk believe it or not. It seems crazy considering in most cities you see a salon or a spa on almost every street corner!
How Salon Loans Work
Unlike with other businesses that use your financial records in the present state, most lenders will not be looking at this. Instead, they want to make sure that you will last so that they will be looking at future sales receipts. They use a little algorithm that looks at a smaller portion of the sales you will receive in the future – these future sales are what are going to be what's used to repay the loan. This is quite beneficial to an owner because it takes the pressure off of you to pay right now, right this second. Also, if you have a slow time of the year – winter, for example, most lenders are willing to work with you to lower your payments for those months and then they can continue when that cycle stops.
Expanding On The Loan
These types of loans are non-specific, so if you already have the business but you want to do a pricey remodel or you want to add in new equipment, beds, chairs, furnishings, etc. you can do so with the loan provided to you. You can also use this credit for marketing and advertising as well. As long as it’s related or relevant to your salon or spa business, you can do whatever you want with the loan you see fit.
Loans For Salons and Spas
One of the best options for a salon or a spa is to get an SBA loan. For this specific type of operation an SBA loan rate will equal right around 6-8% with terms up to 25 years in length.
If you don't qualify for a small business loan, another option is an alternative business loan. This is good for people that have exceedingly good credit – 600+ that will allow you to qualify for the mid prime alternative loan. The rates are a little higher in the 10-20% range and the terms are between 10 months and 5 years.
The very last option available to you, is a cash advance. The interest rates for this type of a “loan” are going to be incredibly high and chances are you will have to also pay it back even quicker than any of these other loan types.
These were just a few of the business models, there are dozens upon dozens to choose from. Some other interesting business models you might be wondering about where you can get a loan include; Doctors Offices, Dental Offices, Hotels, Retail Stores, Gas Stations and a few less thought about businesses such as Agribusiness for Agricultural businesses like working farms – machinery, equipment, cattle, seed, etc. Or how about Energy Loans for the oil and gas industry. All of these loans are available from lenders, it just really depends on who you go with, which is why it’s so important to make sure that you do your research! Not only do you want to ensure you work with a lender that works in the industry you do, but you want to make sure that they offer the loan type you want. If traditional financing is looking bleak, take a look at other options available to you or alternative options. For example, if you wish to open a restaurant but you can't find a loan you could pay off in the time it needs to be paid off, what about a food truck? This is something that would cost much less than an entire restaurant; you could do that for a few years and then perhaps earn enough capital to open a restaurant down the line. It's a good idea to think outside the box!