Real estate is a substantial portion of the business world. Many would consider it the key determinant to the success of a business. It stands to reason that such a large investment involves financing. Here are some of the pros and cons of financing real estate.

Drawbacks to Real Estate Financing

Financing commercial real estate should be done after thorough research and careful planning. The process is not as straightforward as borrowing a home and with good reason. Real estate for business use comes with more significant risks from business dealings. It is not likely to get the same types of government support and funding when economic downturns come.

Terms and rates will vary with real estate financing but expect them to be higher than residential real estate borrowing. Balloon mortgages are more common since they provide a way to keep upfront costs and payments low while building steam. This leaves a sizable amount at the end of the loan, and if you have not met revenue projections, the loan can become a hardship.

Other considerations come into play. Some loans for business real estate even have prepayment penalties. Depending on your loan, there may be restrictions on how you can use the property. For instance, if you are going to lease out a majority of the space, you will not be able to get an SBA 504 CDC loan. It is wise to enlist a professional to make sure you understand all involved in the commercial property financing you are considering.

Advantages to Real Estate Financing

It’s not all difficulties with financing commercial real estate. This is proven by the many companies and entities that benefit from it. For instance, if you have paid down your home mortgage, you may be able to use a HELOC (home equity line of credit) to secure the real estate loan. This tactic will help you reduce your interest rates.

On the other hand, the interest rates for real estate financing are usually lower than other business loans because the property can function as collateral. If your credit isn’t yet high enough, you might be asked to provide a personal guarantee or other assets as collateral. Still, the possibility exists that you don’t have to provide extra collateral at all.

A crucial factor for succeeding in your small business is to be in the right place at the right time. This is never more important than when it comes to your real estate location. By staying on top of your financing options, you’ll be able to jump at a great opportunity.