How to Get a Business Loan for Rental Property

As a new or experienced small business owner, you might already be familiar with the “home-based business” model. And if the business gods have smiled on you, your business might be growing quickly. Which begs the next question: Has your business outgrown its current space?

If the answer is yes, then you are probably weighing the pros and cons of buying vs. renting a larger business space. Maybe after careful consideration, you realize that you don’t have the means or the desire to make a large property investment at this point. But how do you make the switch from low overhead to more overhead without putting undue financial strain on your business budget? Leasing a space might be your perfect answer.

So let’s explore the rental property option since it might give your business the room it needs to grow without committing to a large real estate purchase.

In the search for a business home base, it’s easy to be impressed by lots of floor space. That said, remember that the total amount of your business loan for rental property will be based on square footage, so knowing how much space you actually need is key to making a smart financial decision for your business.

When you’re making those annual or quarterly rent payments, you want to be confident that you’ve made a good investment. Likewise, lenders will want to see that you have the ability to meet your debt obligations. This is essential for them to consider you a good credit risk when offering you a business loan for rental property.

Now that you’ve decided what your requirements are in terms of property location, size, or cost, you probably have a pretty good idea of what size business loan you need. Now, it’s time to take a look at which business loan type will fit your needs.

Any loan product or debt has a specific repayment time frame. In the funding marketplace, you’ll find short-term (less than one year), medium-term (1-5 years), and long-term (up to 10, 20, or even 30 years in some cases) loan products.

The ideal business loan for rental property will probably fall into the medium-term category. A medium-term loan won’t put the strain on your cash flow that short-term loans often do but also aren’t so long that you might outgrow your location before the end of the agreed upon term.

Let’s take a look at some good medium-term loan options:

Term business loans are just like other “simple interest” traditional bank loans. In this scenario, a lender offers you a lump sum of cash up front for a specified period of time and at a specific rate of interest. You repay the loan amount along with any up-front fees and interest. Payments are typically due at monthly intervals and follow a consistent month-to-month cost structure. This makes budgeting easier and lets you use your cash flow for other expenses.

Other advantages include deducting the loan interest on your income taxes and establishing or boosting your credit score by making payments on time. Since these loans can be used for almost any business purpose, flexibility is an advantage as well.

Because you receive all the funds at once, a term business loan for rental property will satisfy the need for paying advance months’ rent required for the rental deposit.

Depending on how much credit history your business has to show, you might be asked to provide collateral or sign a personal guarantee. This could also be the case if your credit scores, personal and business, are on the lower end of the scale.

Be sure you check the fine print for phrases like “balloon payment,” which means at the end of your term, one additional large payment is due. Although this makes all the previous required payments attractive because they are smaller, it means you must budget for that last large payment or refinance that amount.

Also, check with the lender about any prepayment penalties. If your business outgrows the rental property faster than you planned, you will want to pay off the term loan early in order to finance bigger accommodations.

If you choose a term loan for funding, be prepared to complete a lengthy application process. However, the time will be worth it because many term loans can be closed in as little as two to three days. Loan amounts vary from $25,000 to as much as $500,000. Lenders typically look for a credit score of 600+ and, again, you may need to furnish collateral.

Contrary to what many people assume, the U.S. Small Business Administration does not actually make loans. Instead, it partners with banks and other trusted lenders to share the risk involved in lending money to a new or growing small business. Because SBA loans are partially guaranteed by the government, they are attractive for lenders as well as small business owners.

SBA business loans can help small business owners like you get the funding needed for just about any purpose, including a business loan for rental property. The goal of the SBA is to offer these type of loans at a more affordable cost than may be available through a traditional business loan.

The upside? SBA loans  almost always have the lowest interest rates and the longest, most affordable repayment requirements. Three different versions of the SBA loan make it simple to choose the one that will work best for your situation.

The SBA 7(a) loan is the most popular and flexible; the CDC/504 loan is most often used to purchase large equipment and commercial real estate; and the Microloan program addresses loan requests of $50,000 or less.

The downside to working with an SBA loan is that the application process is lengthy and usually takes longer to close, meaning the time between the application and when the funds are actually dispersed can be as much as three weeks or even longer.

Because SBA loans are designed to be accessible to startups and newer small businesses, lenders look for a strong personal borrowing history. Borrowing limits range from $5,000 to $5 million, and repayment terms run between five and 25 years. SBA loans have a longer repayment term than the other loan options we mentioned‚ but the terms are so good it’s a favorite among business owners.

Your personal or business credit score needs to be healthy (620+), and you might also be required to provide collateral or even a down payment to secure the loan.

If your business is well established and has a strong credit history, a business line of credit could be the perfect business loan for rental property. A business line of credit is a “revolving” pool of money, much like a credit card.

Banks or other lenders set up a specified maximum credit line from which you can then draw necessary funds whenever you need and in whatever amounts you need.

The greatest advantage to a line of credit is that you only pay interest on the amount you actually use. Consequently, you only make payments on that amount as well.

Of course, the flexibility and convenience of a business line of credit does come at a cost, as interest rates tend to be higher than with some other traditional funding tools. Even so, paying a higher rate for funds you’re actually using will usually cost you less in the long-run than taking out a term loan just to have the funds sit in your bank account.

For a business line of credit, the maximum credit limit ranges from $10,000 to over $1 million, and repayment terms are at your discretion, depending on how much you have withdrawn.

For use as a business loan for rental property, the big plus with a line of credit is that after you repay the amount you use for the rental, it can then be used at will for any future funding needs you may have.

When applying for a business line of credit, less-than-perfect credit scores are acceptable. Just be prepared to pay higher interest rates. And finally, this flexible funding tool can usually be approved in one to two days, giving you quick access to the cash.

Just like any other loan request, the question of getting a business loan for rental property will require specific types of documentation. In order to verify that you are an acceptable credit risk for them, lenders want to see both personal and business information that demonstrates your business knowledge and financial stability.

Show lenders that you are knowledgeable about your business’s current and future financial health by providing a comprehensive business plan. Lenders will want to know that not only do you have a specific purpose for the loan proceeds but that you have also carefully evaluated your business’s ability to repay the debt. This is not necessary for every time of loan but usually will be for long-term loans and SBA loans.

If your business is already established, you will need to produce a packet of financial reports including a balance sheet, a profit & loss statement, a current cash flow statement, and a current business debt schedule.

If your business is relatively new with little or no history, be prepared to have your personal credit history be the standard lenders will use to evaluate your creditworthiness.

It is essential that you furnish the last three months of business account bank statements—personal account will not suffice. Lenders want to see an active business account. They also want to see an average daily balance of at least $3,000 as a cushion, and $5,000 is even better.

Yes, lenders will want to verify both personal and business credit reports. They will access the three major credit reporting agencies themselves (TransUnion, Equifax, Experian), but it would be smart for you to check them in advance to determine if there are items or information that need attention before beginning the business loan process.

Keep in mind that depending on the product offered, those same credit reports will dictate the interest rate and the length of repayment terms for your business loan for rental property.

Whether you have already identified the perfect location for your upcoming expansion or you’ve picked the desired area and are still looking for the exact-sized rental property, the lender will want to know any specifics you can give about the property.

Information about the size, age, and condition of the buildings involved; area surrounding the property and any potential for liability and risk factors; and tax value of the property are all things a lender want to know when considering a business loan for rental property.

Identify what you actually need in a new rental space for your business? Check. Narrow down the choices for the type of funding you think will be the best fit for your growing business finance needs? Check. Now it’s time to choose a lender or lenders and submit your application.

Fortunately, many lending choices out are there that can help you find a business loan for rental property—so don’t be afraid to shop around for the best loan rates and terms you can find.

Even better, find and use a professional funding marketplace to help narrow down the choices. Using an experienced professional to help guide you through your small business growing pains will enable you to concentrate on making your business vision become a reality.

Most importantly, remember that the opportunity to move into a rented space is an exciting milestone for your business. With the right funding tools at your disposal, you’ll have everything you need to make the most of this exciting next stage in your business.