types of commercial real estate loans

Types of Commercial Real Estate Mortgages in Canada

It’s important to understand the various financing choices accessible to you whether you’re moving into, remodelling, leasing, or purchasing commercial real estate. Take the time to figure out which ones are a good fit for your project and find new ways to acquire the help you need during this often-difficult time.

Here are some of your best commercial real estate financing alternatives for a purchase or lease.


Types of Commercial Real Estate Loans

The most common method of financing for commercial real estate purchases is a mortgage loan. While the interest rate is vital, other factors can also be essential to the purchase’s success.

Types of Commercial Real Estate Loans

The loan-to-value ratio—the percentage of the property’s value that the bank would finance—is one of the most essential terms. Depending on the building’s condition, resaleability, and other considerations, banks typically offer to finance up to 75 to 80 percent of the value of commercial real estate. 

Any gap will almost always have to be covered by your company’s working capital or your own personal funds. A greater loan-to-value ratio suggests more money is available to invest in expansion or cover cash shortfalls in the short term.

The amortization term is a second variable. For commercial real estate, this normally varies from 15 to 25 years. A longer amortization term may be better because it ensures that more money remains in your company’s hands right now.

The bank’s flexibility in terms of loan repayment is a third key factor to examine. For example, you might be able to acquire a one- or two-year principal payment holiday to cover the cost and inconvenience of the transfer. Alternatively, if you have a cash shortage later, flexible terms may allow you to make interest-only payments for a few months.


Working Capital Loan

Working capital loans are used to fund a company’s day-to-day operations, such as marketing and sales, product development, payroll, and other expenses.

Working capital loans provide short-term funding to help businesses bridge financing gaps, such as the time between the collection of accounts receivable and the payment of accounts payable, or to replace periods of low activity in a seasonal industry (they are repaid during periods of high activity). Working capital loans are obtained in a single payment. 

Working capital loans are nearly always secured (i.e., repayment is guaranteed by the assets of the company). The repayment structure—interest rate, term, and amortization period—is determined primarily by the borrower’s ability to pay off the debt and, secondarily, by the loan’s security. When land or real estate is used to secure a loan, payment terms are usually longer and interest rates are lower.


Leasehold Improvement Loan

When a company leases an office or a facility, they will almost certainly want to personalize the space to meet their specific requirements. Leasehold upgrades are the term for these adaptations. 

Changes to the lighting or the installation of specialist equipment are examples of leasehold improvements. Listed below are a few examples of leasehold upgrades that specific businesses may require.

  • An accounting firm would want private offices or meeting rooms to discuss confidential matters with clients.
  • A restaurant would want hardware for cooking installed and food storage space.
  • An interior design firm would want extensive shelving to store carpet, tile, paint and other samples.

Bare in mind that leasehold improvements and building improvements are not the same things. A building upgrade is something that benefits everyone who lives, works, or rents space in the structure. A leasehold improvement is something that solely benefits a certain space’s tenant.


Equipment Loan

Equipment loans can stem from a number of places, depending on your credit history and the type of equipment you’re looking to buy. Among these sources are:

  • Commercial banks
  • Credit unions
  • Online lenders
  • Equipment financers

Depending on the nature of the equipment, it may be possible to utilize the equipment as collateral for the loan. Equipment loans can often be for smaller sums than regular bank loans, depending on the type and cost of the equipment being acquired; this could make traditional financing a choice for qualified small business borrowers.

Equipment loans have different terms depending on the lender. Most commercial loans have a maximum repayment duration of seven years, with interest rates that vary based on the lender, your credit history, and the amount borrowed.


Demand Loan

A demand loan is one that can be returned in full at any moment by the lender. The lender and the borrower are both aware of this condition from the start.

Both parties benefit from the arrangement. Lenders prefer the security of knowing they may demand repayment, whether to seek other investments or simply recoup their capital. Demand loans offer borrowers the convenience and flexibility of being able to repay them in full or in part at any time without penalty.

Demand loans are used for a variety of reasons by borrowers, including:

  • Bridge financing
  • Partnership loans
  • Investment loans
  • Short-term funding for new businesses
  • Purchasing small assets like cars, farm animals or used equipment
  • Temporary working capital

Promissory notes are used to document all demand loans, and they show the principle amount as well as the interest rate. They always employ a floating rate that is based on the lender’s prime rate (for example, prime + 2%). They provide a variety of payment options.


Line of Credit

A line of credit is a loan that allows you to borrow money up to a certain amount. There is no requirement that you spend the funds for a certain purpose. You can utilize as little or as much money as you want, up to a certain limit.

You have the option of repaying your debt at any moment. Only the interest on the money you borrow must be paid.

You may have to pay fees to use various lines of credit. You may be required to pay a registration or administration fee, for example. Inquire about any fees related with a line of credit with your financial institution.

A Home Equity Line of Credit‘s interest rate is usually changeable. This means it could rise or fall over time.

From the time you withdraw money until you pay the debt in full, you pay interest on the money you borrow.

The interest rate you pay on a line of credit may be influenced by your credit score. It informs lenders about the danger of lending you money. The lower the interest rate on your line of credit, the better your credit score is.


Vendor Financing

Vendor financing differs from lease-purchase/rent-to-own in that the seller of a property gives the buyer a loan to cover a portion of the purchase price. Vendor funding can take the following forms:

  • Vendor Take Back Mortgage (VTB)
  • Agreement for Sale (AFS) 

When the seller acts as the buyer’s bank, the buyer benefits from immediate ownership of the property, whereas under rent-to-own, the buyer is merely a tenant who does not own the property until they organise their own mortgage and exercise their right or option to acquire it. 

Vendor Financing, like Rent-to-Own, can be utilized to sell a home if the potential buyer does not qualify for a loan large enough to fully acquire the property. The owner who is providing the loan usually has a lot of equity in the house, although this isn’t always the case.

Another advantage of this type of financing for a homeowner is that after the sale of the home, he or she will have a consistent monthly income. By postponing the final sale of their property, owners can sometimes avoid or spread out paying capital gains tax on the sale of their property.


Related Articles

Apply today for Consultation with our Mortgage Specialist

Scroll to Top
Scroll to Top