A commercial loan agreement means an agreement between a borrower and a lender where the loan is a business. Whenever a large loan is made, the individual or organization must enter into a loan agreement. The lender offers a loan, provided the borrower agrees to all the terms of the loan, such as a prepaid interest rate and specific repayment dates.
Loans come with interest rates. Interest is actually an additional payment that a borrower has to make on the principal (the amount of the loan made to him) in order to qualify for a loan.
Commercial loans differ in a number of ways from ordinary loans made to individuals. Read on to find out how.
How a Commercial Loan Works?
Commercial loans include both the borrower and the lender. A commercial lender is likely to be an organization or a business.
Borrowing under a commercial loan agreement requires the borrower to pay a fixed interest rate clearly defined within the terms of the loan. In addition, there are pre-determined dates on which the borrower is required to repay the principal’s loan amount.
The most common reasons why commercial loans are sought include beginners who want to grow or established companies who want to expand. The important point to be made here is that lenders who offer commercial loans offer a greater amount of money to the borrower and face greater risks if the startup fails to start or the extension does not generate more money for the company.
Commercial loans can be secured or unsecured. The main difference between the two is how the lender is able to reduce the risk of the loan.
Secure Commercial Loans
In order to get a secured business loan, the borrower must have a mortgage that can be used in the event that the payment is not made. For example, a company might use its building, a company car, or a piece of machinery as collateral. The size and amount of the collateral are determined by the loan amount and the borrower’s specifications.
If the borrower is unable to repay the loan, the lender will then be entitled to a mortgage immediately. Depending on the size of the loan, the lender may withdraw from it with a bad agreement; however, gaining anything as repayment of a loan you have not paid is better than not getting anything.
A secure loan is easy to get because of the collateral provided. This helps the lender to reduce the risk of the loan. It also means that interest rates on loans will be lower.
Unsecured Trade Loans
Unsecured commercial loans are very difficult to obtain because, as the name suggests, there is no security for the lender. Collateral is not required, which means that if the borrower fails to pay, there is little way for the lender to repay the loss.
An unsecured commercial loan often requires the borrower to have excellent financial stability, good credit score, and a guaranteed credit record. Lenders often need to meet additional requirements in order to obtain a secure loan. Also, interest rates on unsecured loans are very high because the lender is taking too much risk.
Want to learn more about commercial loans, and improve your career as a world-class Commercial Loan Broker or Commercial Loan Officer? Use the form below to learn more about CFI’s Commercial Banking & Credit Analyst certification.
What are Commercial Properties REITs?
Commercial real estate REIT real estate investment trusts are specialized in commercial real estate. REITs operate as joint ventures, where investors donate money to a central swimming pool to purchase commercial real estate. It gives them the opportunity to expose themselves to the investment of real estate without buying the buildings themselves
How Can You Invest In Commercial Property REITs?
Real estate can be divided into residential, industrial, and commercial areas. Commercial real estate offers business space for business activities and includes office buildings, hotels, production buildings, convenience stores, etc. Compared to residential areas, real estate for sale is considered a reasonable investment as it has a high return.
However, it also means that the investor will have to pay a large cost of setting up the real estate and customize each unit according to the preferences of each tenant. An investor interested in investing in commercial real estate may choose to invest directly in real estate or by having shares in REIT investments in real estate.
- Direct investment
Direct investment requires a large amount of money to fund new construction and acquisition of existing commercial buildings. Commercial real estate is a high-risk investment with high returns. It means that people who invest directly in those properties must have valuable information about the industry and a large amount of money.
Direct investment is ideal for high-value people and institutional investors. To learn more about financing real estate investment, consider CFI’s Commercial Real Estate Finance Specialization.
- Indirect investments
Indirect investing is the most popular way to invest in real estate without spending too much money or participating directly in that property. Investors own real estate through real estate investments in real estate.
REITs develop and own stock markets, and investors can buy their shares the same way they buy stocks and bonds. It also means that investors will own real estate without taking on any debt, as is the case with direct investment. Investors receive a portion of the proceeds, which is distributed to shareholders as dividends.