Can a Business Loan Be Used To Buy Property?  

Despite the growing trend of e-commerce, businesses, for the most part, are still operating out of physical facilities. In 2022, Statista found that global in-store business retail sales hit $20 trillion in U.S. dollars.  

As a business owner yourself, there may be plenty of reasons why you need a physical facility or property out of which to operate. Whether you're opening a new location or starting your first business, a commercial property such as a storefront will hopefully draw in plenty of foot traffic and grow your business even more. 

However, acquiring property to operate your business out of is easier said than done. Since so many businesses go through this process, there are plenty of methods you can use to buy commercial real estate—the most popular being a business loan or a commercial real estate (CRE) loan. 

Depending on your use of the property, your financial history, and even your plans for the business, some methods may be better than others. The good news is there are different types of business loans that will fit your needs. 

Different Methods for Buying Commercial Property

One of the most common loans used to buy property for business purposes is a commercial real estate loan. As opposed to a residential mortgage, commercial mortgages are typically more expensive and evaluate both the business's credit and the investment's potential profitability. 

Because of this, comprehensive investment management, as well as an understanding of how you plan to use your finances for future endeavors, is essential for your business. 

There are, however, different methods that will enable you to obtain a commercial property loan. Since no business is the same, no method is either. Some methods may work better for you based on your business's history, plan, and investment portfolio. 

Other methods may require you to pay higher interest rates, and they may come with different terms that do not suit your needs. When evaluating which method is best for your business, know which priorities you want to meet with your loan.

Small Business Loans 

A small business loan is a more general loan, an umbrella that a CRE loan may also fall under. Most lenders will require you to detail what you plan to use the loan for, but don't worry — many lenders help businesses seek out loans to open a physical facility.

If you go this route, anticipate a longer waiting period for approval on a business loan[1]. Most lenders take about a month to evaluate all the considerations with the loan, including the merit behind the investment, your credit history, and your plans for your business.  

If you do not have any backup finances during this waiting period, it may be best to look at other options for property funding.

Business Line of Credit

Unlike a small business loan, a business line of credit is a more flexible option, and you only have to pay interest on the amount of money you borrow for short-term periods. 

While a small business loan involves installment or revolving payments to pay off a large sum of money, a business line of credit only requires paying an account maintenance fee and a draw fee.  

Although this may be convenient, this method should mainly be used for short-term financing. Unless you have an extensive plan of action to pay these installments off quickly, it's best to opt for other methods.

Personal Loans and Credit Cards 

Although you can certainly use your personal credit or a personal loan for business property, be prepared for an outcome that could affect your credit score. For example, if you miss a payment, that failure will inevitably show up in your personal records for any future financial situation. 

In addition, personal loans typically have higher interest rates than other lending options, and personal loans aren't tax deductible, while other loans, such as small business loans, are. 

However, there are plenty of advantages to utilizing this method as well. For one, lenders are more flexible when giving out personal loans — meaning you'll be more likely to gain approval and do so on a faster timeline as well. 

How To Qualify for a Commercial Real Estate Loan

If you opt for a commercial real estate loan, be prepared for a detailed approval process with a commercial real estate lender. This process may also vary depending on the type of lender you work with, but most typically factor in the following:

Property Use

Unlike a residential loan, a commercial real estate loan involves more steps than just interacting with a lender. CRE lenders will typically require that you follow local ordinances—such as only buying property in commercial zones—and agreeing to terms for the use of the property. The most popular term many businesses follow is agreeing to use the property for business purposes at least half the time.

Financial Analysis

Lenders will also conduct a financial analysis of the loan. This analysis examines your ability to meet various requirements, such as a decent credit score, stable financial history, and a certain debt-service coverage ratio (DSCR). 

A DSCR determines your ability to repay loans based on your current income and savings. To calculate this ratio, most lenders will need tax-return records (both personal and business) and any other official business documentation, such as operating agreements.  

Document Preparation

Along with personal documents (like a birth certificate or passport) and a W-9 tax form, lenders will need other pertinent information to assess the potential profitability of your business.

The best way to convey this information to lenders is through a business plan. When creating your business plan, you must be as thorough as possible—especially when discussing your plans for revenue and your response to unforeseen business costs. From there, lenders will decide if you meet their requirements and calculate further loan terms.

Apply for a Commercial Real Estate Loan Today!

At Idaho Trust Bank, our local commercial real estate lenders in Boise and Coeur d'Alene, Idaho, offer a personalized, relationship-based approach to business banking and lending. We will discuss your business's specific goals for acquiring and using commercial property to help you find the best business loan solution. Contact us or apply for a commercial real estate loan today!