A commercial loan in Massachusetts is an excellent source of funding for a commercial property purchase, such as a retail space, an office, or a minor industrial complex.
There are many different types of commercial loans. The type depends on the purpose of the property being purchased. A commercial loan could finance a hotel or motel, light industrial building, marina, apartment building, auto services building, bed-and-breakfast, mixed use property, mobile home park, multi-family unit, office, campground or RV park, convenience store, gas station, health care center, retail space, self storage compound, warehouse, or restaurant. Here are some of the most common types:
Traditional Purchase Loan
Purchase loans have fixed or adjustable rates, much like a residential mortgage. Interest rates are contingent on loan-to-value ratio, or LTV, and the property is used as collateral. There is some relative flexibility where credit and income is concerned with traditional commercial purchase loans.
Outstanding credit and high, steady income is often required for bridge loans, since they offer immediate capital on the short-term - typically one year - to suit a commercial project's beginnings, often from a private lender. Longer term financing should be pending while these short-term funds are borrowed.
Most used among lasting retailers and stable offices, the participating mortgageholder gives the lender a cut of the business or real estate revenue along with interest and principal payments every month.
Usually offered by private lenders because of their substandard requirements, hard money loans carry unusually high interest rates since they are particularly high risk. The property serves as the collateral for financing.
Credit and NOI
Commercial loans typically have strict credit and debt requirements, although the spectrum is wide thanks to the flexibility many private lenders offer. To have a credit (FICO) score of 700 or higher is ideal, but certainly many commercial loans have been approved for borrowers with credit in the 680 to 700 range. There is hope for borrowers whose credit is even lower, but lenders will look for compensating factors, such as a high net operating income (NOI), which should surpass the monthly mortgage by at least 25%.
Debt Service Coverage
Another factor lenders will examine is borrower debt service coverage, which is a ratio of the yearly net operating income over the mortgage payment. Businesses should have a debt service ratio of over 1.25, as determined by a licensed appraiser's estimates.
Debt Yield Ratio
Lenders will also consider a commercial loan borrower's debt yield ratio, which is their NOI divided by the total mortgage loan. A business with an NOI of $500,000 per year and a prospective loan amount of $7,000,000 will have a debt yield ratio of 0.0714, or 7.14%, meaning even if the property is foreclosed out the gate, the lender will receive a 7.14% return.
Commercial lenders, whether for small business, hard money or others can be difficult to find. Lender411 has a number of commercial lenders in its directory. Find one near you by filling out the form at the top of this page.
Boston, Worcester, Springfield, Cambridge, Lowell, and Quincy are some of the largest and wealthiest cities in the state of Massachusetts. Boston definitely leads the way as a major international destination and place of business. But you don’t have to be an experienced business owner to purchase commercial property in any of these areas. You simply need a plan and some minor financial capacity. Contact a local lender to discuss your commercial loan option.
The U.S. Small Business Administration, or SBA, offers affordable financing opportunities to help small businesses grow. The Massachusetts SBA District Office is located in Boston. Generally, small business owners can finance their endeavors in two ways: equity or debt financing.
Small business owners can receive funds through equity financing without acquiring debt. In exchange for ownership share, another company raises funds for the recipient. The SBA recommends business owners take the equity financing route if their business has a high debt to equity ratio; that is, if they have borrowed for their business more than they have invested.
For the opposite case - a business owner has a high equity to debt ratio - debt financing is a safe option, and recommended by the SBA. Debt financing is the borrowing of money from a lending institution or private lender, to be repaid over time, and usually with interest. The allowable loan amount, length of repayment term, and interest rate will vary depending on the lender.
Help Through SBA
Your local SBA office may be able to offer aid through the Financial Assistance Program. Eligibility depends on several factors, although special considerations may be made for franchises, farms, medical facilities and more. Here are the basic criteria for eligible companies:
To see if you qualify for special considerations, contact the Massachusetts SBA District Office: 617-565-5590.
Massachusetts is a great place to own a commercial property. Most of the state’s population of 6.4 million live in Boston. Much of Massachusetts' economy resides in higher education, financial services, and health care. The state has a major influence in national sports. Teams such as Boston Celtics, the New England Patriots, the Boston Red Sox, and the Boston Bruins have all won national titles many times over. The city is also home to prestigious sports events such as the Boston Marathon.
Much of Boston is considered the economic and cultural center of the entire New England region. Boston is also known as one of the most famous higher education locations in the nation. Schools such as Boston University, Harvard, and M.I.T. all are situated here. The city's economy is based on research, finance, and technology, primarily in the biotechnology field. Fidelity Investments, Merck & Co., and Beacon Press are all located in the state.
For those who are looking to settle down in a state with a good educational background, provided that you don’t mind the winter cold, Massachusetts is an excellent place to purchase a commercial property. Lender411 can help you find the best commercial mortgage rates.
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