Table of Contents

  • Types of Business Expansion Loans and Financing
  • Commercial Property Loans
  • Business Term Loans
  • Lines of Credit
  • Small Business Administration Loans
  • Who Offers Renovation Loans for Commercial Property?
  • What You Need to Know Before Applying

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Learning the ins and outs of how to finance business growth can take time, a precious commodity in the small business world. 

With that in mind, we’ve compiled a list of top financing options for business expansion. 

Whether your small business is poised to expand or can benefit from modernization, we’ll provide you with funding details to meet your needs.

The average cost to renovate office space is about $200 a square foot.

Types of Business Expansion Loans and Financing

If you’re looking to renovate your office, add a location, increase your product offerings or reach new customers, there more than likely is a financing option out there for you. 

Let’s take a look at the commercial property and business expansion loans available.

Commercial Property Loans

Interested in purchasing a property to expand your business? Apply for a commercial real estate loan if you want to purchase a business property or refinance a loan on an existing commercial property. 

Examples of eligible property types include:

  • Office space
  • Building
  • Business complex
  • Shopping center
  • Retail shop

Some lenders may require you to occupy the space, so if you’re looking to buy property as an investment, be sure to read the fine print. 

Commercial property loans can be used to buy buildings, such as this shopping complex with multiple storefronts.

Interest Rates and Terms

Interest rates and repayment terms vary depending on various factors, including lender and loan type. Bank of America, for example, offers commercial real estate loans for purchasing or refinancing starting at $25,000, with interest rates as low as 3.75%, as of Oct. 1, 2019. Loan terms are available for up to 10 years with a balloon payment at the end of the term.

Alternately, if you want to be done paying at the end of the term, the bank offers a fully amortized loan to be repaid in 15 years, eliminating a balloon payment. Qualifying loans may be eligible for a lower introductory interest rate. 

In contrast, Santander Bank offers owner-occupied commercial real estate mortgages with repayment terms up to 25 years, with financing available for up to 80% of the property value or purchase price.

Business Term Loans

If you’re looking for a renovation loan for commercial property, consider a business term loan.  You could secure funds up to $500,000 and possibly higher. Once your term funding is approved, you’ll get one lump sum. 

You can use this money to revamp your building or office or refinance existing debt related to construction or expansion projects you’ve already completed. While short-term loans are available, renovation and expansion projects typically take time, so you’ll want to look for funding you can pay back in years, not months. 

Interest Rates and Terms

Interest rates on business term loans vary by lender, loan and borrower creditworthiness. Bank of America, for instance, advertises rates as low as 5.75%. In contrast, Wells Fargo’s business term loan rates can reach 22.99%, as of November 2019. Interest rates for business term loans are usually fixed, though some lenders may opt for variable rates. 

Repayment periods often run 1 year to 5 years. However, repayment terms could extend longer depending on the lender, sometimes up to 20 years. Business owners typically make monthly payments throughout the loan term.

Lines of Credit

Another type of business expansion funding is a line of credit, which is often revolving. This means that a lender approves you for a certain amount and you use however much you need when you need it, like a credit card. 

As you pay down your debt, your credit line is replenished up to your original limit. Some lenders also allow you to take a cash advance with no penalty, which might be helpful when you’re working with various vendors and contractors.

Let’s look at the two common business lines of credit:

Unsecured Line of Credit

If you don’t have collateral to offer a lender, you might apply for this type of financing. Keep in mind your credit limit likely will be lower and interest rate higher than you’d find with a secured credit line. Depending on the size and cost of your business expansion project, this kind of funding may be a viable option.

Secured Line of Credit

Secured lines of credit are less risky to lenders because you’re putting up something of value as collateral. This way lenders aren’t on the hook if you can’t make your payments. Secured lines of credit generally have lower interest rates and higher credit limits than unsecured lines. Some lenders also offer equity lines of credit, for which you’d use real estate that you own personally or that belongs to your business to secure your loan.

Interest Rates and Terms

Interest rates for lines of credit are often variable. Some lenders will base your interest rate on the prime rate, which fluctuates. 

Small Business Administration Loans

Loans to expand your business are available through funding insured by the Small Business Administration (SBA). SBA loan programs are less risky for lenders because the federal agency guarantees a percentage of the loan, up to 85% in some cases. Lenders partner with the SBA to offer these competitive loans to borrowers who might not have qualified for conventional small business loans. 

SBA 7(a)

If you’re looking for a business loan for property renovation, consider an SBA 7(a) loan. This kind of financing allows qualified borrowers to access up to $5 million to fund business needs, including renovations, as well as:

  • Expansion
  • New construction
  • Purchase of land or buildings
  • Purchase of equipment and fixtures
  • Lease-hold improvements

SBA CDC/504

Certified Development Company (CDC)/504 funding is a type of renovation loan for commercial property. Loan amounts can range from $25,000 to $20 million, though the CDC will only service 40% of the loan, up to $5 million. What about the remaining percentages? The borrower provides a 10% down payment, and a third-party lender finances a minimum of 50%. It’s important to note that the SBA only insures the portion covered by the CDC. 

In addition to renovating and constructing facilities, with this type of financing, you could buy:

  • Buildings
  • Land
  • Machinery with 10 or more years of useful life

You also could use funding to make improvements to:

  • Gutters
  • Parking lots
  • Landscaping
  • Roofing
  • Heating and cooling systems
  • Electrical systems 
  • Plumbing

Funds can be used to refinance debt related to business expansion, too. Also, you can pay for professional costs related to your expansion project. You can even create a reserve fund with up to 10% of the construction costs associated with your project.

SBA Express

If you don’t expect your renovation and expansion project to exceed $350,000, an SBA Express loan may offer a solution for your financing needs. You could have access to capital in about a month. Compare this to a 7(a) loan that could take 2-3 months to get funded.

Interest Rates and Terms

Interest rates on SBA-backed loans vary by lender. However, the SBA does set interest rate limits, which a lender can’t exceed. Rates can be fixed or variable. Maximum variable rates can be tied to one of three rate types, one of which is the prime rate. 

The Wall Street Journal states the U.S. prime rate was at 4.75%, as of Oct. 31, 2019, with a 52-week high of 5.5%. 

 

For the 7(a) program, the following maximum interest rates for variable loans apply*:

Maximum interest on SBA loans vary by lender, loan amount and maturity, ranging from base rate plus 2.25% to base plus 4.75%.

Repayment terms for the 504 loan vary depending on the use of funds. For instance, if you plan on using the funds to purchase real estate, loan maturity is either 20 years or 25 years. If you’re buying machinery, you’d be expected to repay your loan in 10 years. 

The current maximum interest rate that a third-party lender is able to charge for a 504/CDC commercial loan is 6% more than the prime rate (with the exception of maximum interest rates limited by state law), according to the Congressional Research Service. The interest rate for the CDC portion of the loan takes into account the current market rate for 5- and 10-year Treasury issues, plus additional fees. As of Nov. 7, 2019, the U.S. Treasury interest rate was 1.74 for 5-year issues and 1.92 for 10-year issues. 

The maximum rate for SBA Express loans is the prime rate plus 4.5 for loans exceeding $50,000. The interest rate limit for SBA Express loans less than $50,000 is prime plus 6.5.

Who Offers Renovation Loans for Commercial Property?

Not only do you have choices when it comes to your funding, but also your lender. 

With so many options, how do you decide? Let’s take a look at a couple of main players in the small business lending space.

Three employees set up an office space, with new furniture and accessories purchased with a business expansion loan.

Conventional Banks

Banks typically have strict lending terms and slow processing times. After a lengthy application process, it could take months to obtain funding. The upside is that rates are lower than you’d find with most online lenders. 

If you’re a small business owner with poor credit and have been in business less than a year, you might find obtaining a loan with a bank to be a challenge. 

Alternative Lenders

One of the most significant benefits of online lenders is the ease and speed of which you can apply and be approved for funds. 

Depending on the type of financing and lender, you could have access to capital in as little as one day once approved. This benefit often equates to less competitive interest rates and shorter term lengths, however.

What You Need to Know Before Applying

When determining how to fund your business’s growth, you need to be prepared for the application process, which could be lengthy depending on the loan and lender. 

Also, keep in mind that whatever interest rate you’re approved for, additional fees may apply. These could include origination fees, closing costs, prepayment penalties and late fees.

Application Details

You’ll need to provide lenders with access to your business’s financials. Many alternative lenders advertise a hassle-free application process and are generally less stringent than conventional banks, which might require you to provide:

  • Profit-and-loss statements
  • Tax returns
  • Business plan 

Criteria Lenders Consider

Lenders review multiple components when evaluating a business owner for commercial property and business expansion loans. The most common considerations include the following.

Credit Score

Lenders will evaluate your personal and/or business credit score when determining whether to approve you for a renovation loan for your commercial property or business. Credit score requirements vary depending on the loan type and lender, with online lenders generally offering more leniency than conventional banks. 

If you’re looking to apply for business financing through a conventional bank, you should have a minimum personal credit score of 640 or higher, with approval odds rising for those with scores of 700 or more. 

Time in Business

For conventional loans, banks may require you to have been operating your business for at least 2 years. Loans insured by the SBA may require less time in business. In contrast, online lenders may only require you to have 3 months to 1 year in business.

Revenue

You need to show that you have income to cover your debt. Lenders will generally require that your business bring in a minimum dollar amount per year. This amount varies depending on the loan type and loan amount. Some online lenders may require only $75,000 in annual revenue. However, other lenders may require $200,000 or more. For instance, for a commercial real estate loan, Bank of America requires a minimum annual revenue of $250,000. 

Cash Flow

Revenue alone is not enough. Lenders need to know that you can manage your money. You could make a million dollars a year, but if more money is going out than is coming in, high revenue won’t count for much.  

Collateral

Collateral reduces risk for lenders. It lets them know that if you aren’t able to repay your debt, they still have something of value they can cash in. In some instances, lenders may prefer if not require collateral. 

For example, with a commercial real estate mortgage, the property you purchase serves as collateral for your loan. For SBA loans exceeding $25,000 up to $350,000, lenders must, at a minimum, obtain a first lien for assets to be purchased with the funds. Lenders must also obtain a lien on a borrower’s fixed assets, to the extent that the full value of the loan is secure. For loans more than $350,000, lenders must secure as much collateral as possible.

Ready to Apply?

Be sure you have a good understanding of the loan requirements. Analyze your financing needs. What aspects of your business will you be changing with your renovation and expansion? 

Once you’ve created an outline of your project, develop a ballpark budget so you have an idea of how much money you’ll need to borrow.

Get weekly business insights & expert advice to help grow your business.