small business mortgage loans

Small Business Mortgage Loans, What to Know

posted in: Mortgages

Almost 30% of small businesses fail because the business owner ran out of money, while 42% fail due to the lack of a ready market. Other reasons cited by business owners include poor marketing and ignoring customers.

In 2017, only 40% of American business owners applied for external funding compared to 2016 at 45%. In 2016, more small business owners got approved for loans they requested. In 2018, big banks approved 26.8% of small business loans up from 26.9% the previous year. Alternative lenders approved 56.7% of small business loans, while small banks approved 50.2%.

Want to know how these funds are used? Small business mortgage loans are used to buy inventory or expand the business. This financing is seen as critical to continuing a path of growth and pursuing additional market share. As a small business owner, you may be wondering:

  • How do you secure the best small business loans?
  • Where do you start?
  • What are the requirements for low-interest business loans?

In this article, we discuss what you need to know about small business mortgage loans.

What Is a Small Business Mortgage Loan?

This loan option is a popular type of financing for small businesses in need of buying land, facilities, equipment, and more. Issued by participating lenders, the loan rates and terms are manageable for most small businesses.

There is a difference between a business mortgage and a loan.

  • Loan – money provided by a lender to finance your business, typically made against the equity of your business or its financials.
  • Mortgage – a security instrument given by a lender, typically attached to a tangible asset, such as property, land, or equipment.

With small business loans, the lender is the mortgagee, while the borrower is the mortgagor.

How Business Mortgage Loans Work

First, a business mortgage loan requires a lien. This legal right is given by the business owner to the lender to serve as a guarantee for repayment of the loan. In case the business owner is unable to repay the loan, the lender will seize the lien or collateral. As such, the lender has protection against loan default.

Apart from the lien, a business owner must provide a down payment based on the loan to value ratio. The sum can range between 20% to 30% of the total loan value. The best business loans come with two different repayment schedules:

  • Immediate term loans
  • Long-term loans

Before taking out a business mortgage, take the time to learn about the payment structure. Your repayment schedule will affect your cash flow, especially if you choose a balloon payment.

How to Qualify for a Small Business Loan

As a business owner, start by examining your business expenses. This analysis will help you understand how much you need and what you can afford. Another option to find out how much you need or can afford is to calculate your debt service coverage ratio.

Debt service coverage ratio = (net operating income/total annual debt)

What you need to know is that lenders are looking for a debt service coverage ratio of 1.0. Want a forecast of how the loan will impact your business financially? Do a loan performance analysis.

Lenders also look at your credit score. If your credit score is high, then you will benefit from lower interest rates and better terms. Before applying, check your credit score report for any errors and get them corrected. Any inaccuracies will hurt your chances of getting the loan or increase the cost of the loan because they can pull down your score.

A solid and well thought out business plan is another requirement lenders consider. Before applying for a small business mortgage loan, create a solid business plan. Do not forget to talk to a financial expert. He or she can help you craft the best business plan based on your industry and future business goals.

Getting a Small Business Mortgage Loan

As a smart entrepreneur, prepare yourself early before seeking small business mortgage loans. Start by checking for errors in your credit score report. Learn about the repayment structure, and consult a financial expert.

Are you in search of a leading one stop mortgage company? We can help. Feel free to contact us today and get the best possible rate.

7th Level Mortgage is a leading one-stop mortgage company providing deeply informed, custom-tailored assistance with every phase of each mortgage transaction. If you are searching for a home loan in New Jersey, Pennsylvania, Virginia, Delaware, Maryland, New York, or Florida, please contact us today so that we can determine the best Mortgage Lender to place your loan with and get you the best possible rate and program.