Business Loans Backed by Real Estate

The vast majority of organizations will require cash to grow their business. Possibly the best way to achieve this is to take out a business loan. However, a bank or lender will typically require some form of security prior to issuing a loan. This is true whether your business is a start up, a sole proprietorship, or a limited liability corporation.

A bank will want to know about your company’s history, revenues, business credit, balance sheet, and also your equity contributions. You will then need to pass a credit check. If a lender believes that your business is in a healthy state and that you are credit worthy they will be willing to lend you money, but they will typically need some form of guarantee that the loan will be repaid.

As far as a bank is concerned the best guarantee will some form of collateral, and in many cases this happens to be real estate. This is basically an additional form of security which should assure your lender that they have a second source from which the loan can be repaid if you were to default on your monthly payments.

It must be said that since the economic crisis of the mid-2000s and the fact that the housing bubble burst during this time, using real estate as collateral is far harder than ever before. A lender would view an applicant as a viable risk because they offered their home as security and there happens to be a large amount of equity available in this property.

But ever since the housing crisis people have seen the equity in homes dwindle away to almost nothing, and this means that using real estate as security for a business loan has become a far less attractive option for lenders. With that said, if a bank believes that a business is not over-extending itself by offering real estate as collateral, they may be far more willing to approve a business loan.

It is extremely important for a business owner to understand the risks involved with such a transaction. The biggest risk will be that if a business defaults on their loan they stand to lose their collateral, i.e. the form of real estate that is backing their loan. Therefore, it is advisable that any business owner goes into a transaction such as this with their eyes wide open.

This will typically involve being honest with yourself and knowing exactly what you wish to use the funds for. As mentioned, all businesses will require cash at some stage, but this must be achieved without over-stretching yourself. This is where your negotiation skills can be very helpful, and you should remember that you don’t have to accept the first offer you receive.

One of the greatest benefits of backing a business loan with real estate is that you may be able to secure far more favorable terms and interest rates. Whilst it is true that most banks will refer you to their business banking department, which will typically mean higher interest rates, some lenders may be willing to offer certain discounts that are usually reserved for conventional home lending.

The main reason that lenders charge more for a traditional business loan is because this type of lending is considered very high risk. This is especially true of a newer business, as there is no proven track record. In addition to this, business loans are typically far larger than consumer borrowing. There is also far more involved with the credit assessment of a business and unfortunately this will involve a bank spending far more time and money on a loan application.

If you wish to secure a business loan by using real estate as security, the amount of money you can borrow will depend on what type of property you are using as collateral. If you wish to use a residential property the vast majority of banks will be willing to lend between 80%-90% of the property’s value. However, this figure will generally drop to approximately 70% if you are using commercial property as security. However, there are also a few lenders who will not even worry about the actual value of the real estate offered as security, and they are simply happy that they have some form of collateral.

However, it must be said that you will obtain the lowest interest rate possible if you can secure 100% of the business loan. You will generally find that if you wish to borrow more than 90% of a residential property’s value or 70% of a commercial property, higher interest rates will be imposed on you. This will be considered as a very high risk application, and therefore you are likely to be offered a higher interest rate or you may even be declined altogether.