How to Get Working Capital Using Your Commercial Real Estate Property?


The working capital requirements of business generally keep increasing from time to time, especially when a company is scaling up and is need of more resources to fulfill an increased demand. Besides, regular injection of capital into the business from time to time helps with the costs associated with running a small business.

Additionally, there may be situations that you’ve not foreseen that’ll demand additional capital investment. It could be a great opportunity, and to capitalize on the opportunity, you might need an immediate working capital injection into the business.

It could be that asset your business can primarily profit from, which is up for a discount, and you should get your hands on it before your competitors do. Whatever the case be, every small and medium business will encounter a situation where they’ll need to turn towards banks or private commercial lenders to get a working capital loan.

Getting a working capital loan based on the business’s assets is the most common way of getting your loan approved. Primarily when you use your commercial real estate property as secured collateral for the loan, it is elementary to get your loan request approved, and very soon, you can get all the working capital that you’ll need.

However, the hitch lies in getting the right working capital loan. Banks generally give a hard time to small and medium businesses when they’re processing loan requests and base their decisions mainly on the credit score of the business. If your business has a lousy lending history and a credit score below 630, most banks and other traditional lending institutions will turn down loan requests.

However, there is no reason to lose hope. Private commercial lenders are plenty in the market, and they’re the resort for all those small and medium-sized businesses that got turned down by banks. Generally, private money lenders are interested in knowing the recent cash inflows of the business. If the investor can convince them of their loan repaying abilities, the loan gets approved quickly.

In this blog, we’ll cover the various business needs a commercial real estate working capital loan can fulfill, what types of commercial real estate working capital loans are available in the market, and the different lenders who provide such loans. Let’s dive right in!

Uses of commercial real estate working capital loans

#1 – To manage build-outs or make repairs and renovations

Financing the construction, repairs, and renovation needs of the property, which might help move-in a new set of tenants into the property, or make any upgrade that will be useful to the property, is one of the most common uses commercial real estate working capital loans.

#2 – To match the growing tenant needs from time to time 

The needs of new tenants might vary over time, and commercial real estate investors need to have their properties appealing for newer tenants. Different facilities might have to be added to the property, which matches the growing tenant needs.

#3 – To fix crucial business equipment 

In the case of small and medium-sized businesses, their whole business model is very dependent on their equipment. When one of these equipment has a breakdown, they’ll need to immediately replace them or fix them as soon as possible. Working capital loans are the best option in a situation like this.

#4 – Marketing and Advertising expenses 

When you want to conduct an exclusive marketing and advertising campaign, for your new product or service, or to just get your word out in the market, a working capital loan again will be most handy.

#5 – To fulfill the payroll needs 

Working capital loans may be necessary to pay up your small or medium business’s employees on time and in full. This is especially true during an offseason when your business hasn’t made good profits or has incurred losses, unlike the rest of the year. When profits cannot pay your team, you can turn to a working capital loan.

#6 – To suit general operating capital needs of your business

Other than the needs, as mentioned above, you might want to finance a commercial real estate working capital loan just to fulfill your general operating capital needs of the business to ensure the smooth and efficient running of your business.

Types of Business real estate working capital loans 

#1 – Cash-out Refinancing Loan 

For a business with substantial equity in the commercial property of the business, a good way to get a working capital loan would be to tap on this equity in the property. When a business owns real estate, and the total value of the property is appraised over time, valued at a cost much higher than the business mortgage loan, a business can refinance their first mortgage with a second mortgage that is much bigger than the first mortgage, leveraging upon the appraised value of the property.

In the interim, the new lender will pay off the first mortgage loan of the property and provide a more substantial loan with better terms and conditions, providing the needed excess working capital required to finance the business’s working and operating needs.

Thus, instead of leaving a business with two loans, a Cash-out Refinancing Loan will pay off an existing mortgage and leverage the borrower’s substantial equity in the commercial property of the business.

#2 – Second mortgage loans 

If a business owner does not have substantial equity in the commercial property but is a need for working capital to suit the increased financing needs of the business, a second mortgage loan is a go-to option. These loans are used by companies that already have a first mortgage lien and want to use the remaining equity in the property to get a second mortgage lien, using the property as collateral. In this case, the lender’s risks are higher as they won’t have first rights on the property.

When the borrower defaults in loan repayment, the first lien mortgage lender will have the first right to recover his loan repayments from the property. The second mortgage lender will have rights over whatever value of the property is left over after the first mortgage lender recoups their losses.

There is also a chance that the second mortgage lender will be left with nothing to recover his losses. Thus, because of this increased risk possibility, the loan term rates will generally be very high, with a shorter-term loan period. However, for investors in dire need of a second mortgage when their equity in the property hasn’t appraised enough to avail of a Cash-out Refinancing Loan, this is the best option available.

#3 – A commercial mortgage refinance loan 

The third kind of working capital loan is a commercial mortgage refinance loan. These loans are taken when small and medium-sized businesses can find an investment in the market with better terms. These loans are used to pay off an existing mortgage, which is generally more expensive or has down drawbacks. The new loan rids the business off their old primary loan and provides an extra influx of capital to match the business’s changing needs. Borrowers just have to ensure that they’re making a wise decision about refinancing their first mortgage and that this new second mortgage is going to be a better one.

Types of Lenders who provide working capital loans

#1 – Bank Lenders 

Bank Lenders and other Conventional and Traditional businesses are the first options that come into the picture. They offer the best rates for working capital loans, along with the most prolonged-term periods. However, these lenders only favor those who have a high credit score and whose repaying abilities are commendable. For businesses that cannot demonstrate a good credit score, these loans might not be the best option.

#2 – SBA Lenders

SBA Lenders do not offer Cash-out Refinancing or second mortgages; however, they do offer working capital loans under their SBA 7(a) Program, using your real estate property as collateral. These SBA 7 (a) program loans offer highly available rates and terms for your working capital loan.

#3 – Private Lenders

Private Lenders are the non-bank lenders who can offer various types of working capital loans to small and medium-sized businesses. Since these lenders are non-bank lenders, their lending requirements are very flexible, and almost any business owner who can convince them about their repaying ability can source a loan. They can offer flexible loan options and are generally ready to take calculated risks. When banks and SBA Lenders turn businesses down, Private Lenders are the hope of light.

#4 – Asset-based lenders

Asset-based Lenders are the last resort to businesses looking for working capital loans. These loans are provided purely on the value of the assets offered as collateral, from the real estate property to give the line of credit or sale of future receivables as collateral. These loans are generally concise terms and are best suited for borrowers who want an immediate loan to suit their needs, and are confident about repaying it within a short period.

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