commercial mortgage is any property that is secured by properties such as apartment buildings, office buildings, warehouse and shopping centers. These mortgages are used to acquire, refinance or redevelop the property. Underwriting commercial mortgages are generally more extensive and focus on cash flow of the property. These mortgages are usually held by banks, insurance companies or private lenders.
The Pros of Commercial Business Mortgages:
1. Provides a Cash Flow Boost
According to the National Federation of Independent Business (NFIB), the top cash flow struggle for small business owners is irregular revenue streams.
With this type of small business mortgage, though, irregular revenue streams don’t have to be an issue. A commercial mortgage provides the cash you need to invest in new equipment, meet payroll, or afford any other business expenses that you don’t have cash on hand for.
If your business operates in a highly seasonal industry or has long payment cycles, a commercial business mortgage makes it possible to grow your business all year round. Often, business owners struggle to make ends meet in these circumstances, but with commercial financing you can ensure you have ample cash flow.
2. Maintain Ownership of Your Business
In the short-term, selling shares of equity in your company to raise money may seem inexpensive compared to a commercial business loan. However, this funding method carries a different kind of expense.
Many small business owners have found themselves on the outside looking in on their own company after raising funding through equity. By pursuing a commercial business mortgage, your business will remain owner occupied, instead of having investors or board members making the decisions for you. You’ll still receive additional working capital but you won’t lose control of your business that you’ve worked so hard to build.
3. Access to Large Sums Of Money
Small business owners often don’t have the financial capability to raise funding in the debt or equity markets. Nor do they typically have the contacts to raise funding through venture capitalists. This can make starting a business extremely expensive and risky. However, with a commercial business mortgage, it’s possible to cover all your startup expenses with just one mortgage.
This also makes it significantly less daunting for business owners without extensive resources to obtain a relatively large amount of funding. Plus, by consolidating all your financing on one mortgage, you’ll keep things simple.
The Cons of Commercial Business Mortgages
1. Extensive Paperwork and Mortgage Application Process
Since financial institutions extend commercial financing based on your company’s ability to pay, they’ll require extensive paperwork. According to the Small Business Chronicle, when applying for a commercial business mortgage, you’ll have to be prepared to provide “two or three years of tax returns, financial statements, accounts receivable and accounts payable documents.”
In addition, you might have to give a brief presentation to explain your business goals and objectives. It’s also a good idea to have a general outline of your short and long term business plan.
The commercial lender will use these documents and your presentation to decide if you qualify for their financing. If you qualify, they’ll then use this information to determine your loan amount.
2. Lack of Flexibility
With a commercial business mortgage, you’ll need to have a clear picture of what you’ll use the money for and how you plan to pay it back. Unlike business financing options such as a merchant cash advance, business line of credit, or equipment loan, the terms of a commercial business mortgage aren’t flexible. You’ll borrow a set amount of money, make regular monthly payments, and will be expected to repay the mortgage in an agreed upon term.
If your small business has fluctuating revenues, a required monthly payment may not be desirable. Additionally, if you’re not sure exactly how much cash you need, a commercial business mortgage may be too much, and you’ll end up paying interest on money you didn’t need.
3. Risk of Default
No business mortgage is risk-free, which is why you should weigh the risks of defaulting on a commercial business mortgage. Commercial business mortgages may be secured or unsecured.
If your mortgage is secured, defaulting on your mortgage could mean losing valuable assets. Even if the mortgage is unsecured, you run the risk of being taken to court by your lender. At the very least, defaulting on your mortgage (or even making late payments) will negatively impact your business credit score. In some cases, it could also impact your personal credit score.
Conclusion: Determine if This is the Right Type of Business Financing for You
If your business is generating regular revenue, but you still need additional working capital to grow, a commercial business mortgage is something to consider. If you’re able to qualify for this type of mortgage, you’ll need to determine what kind of commercial business mortgage is right for your business. Short-term mortgages may help even out cash flow, but large, longer-term mortgages could allow you to grow for years to come.
As with any financial decision, carefully weigh your business’s needs, your desire for growth, and tolerance for risk before applying for a commercial business loan.