Table of Contents
- What Is a Commercial Equity Line of Credit?
- Types of Property for Your Collateral
- Pros and Cons of a Commercial Equity Line of Credit
- Commercial Equity Line of Credit Uses
- Who Is a Commercial Equity Line of Credit Good for?
- Where to Find a Commercial Equity Line of Credit
- The Application Process
- FAQ
When you’re running a business, you may encounter unforeseen expenses or an opportunity to grow your company might suddenly appear. In either case, you may wonder about small business financing. But without working capital to cover the costs, acquiring it can be challenging.
If your business has substantial commercial property assets, one type of financing you could consider is a commercial equity line of credit.
Key Points
• A commercial equity line of credit (CELOC) lets businesses use their commercial property as collateral to access a revolving credit line.
• Rather than receiving a lump sum, businesses approved for a CELOC can draw funds up to a preset limit during a five-to-ten-year draw period, followed by a repayment phase or immediate repayment.
• Qualifying for a CELOC typically requires owning commercial real estate with sufficient equity, a stable financial history, adequate revenue, and a satisfactory credit score as assessed by lenders.
• A business can use a CELOC for nearly any purpose, including covering cash flow gaps, purchasing bulk inventory, managing payroll, paying office expenses, or funding renovations.
• Applying for a CELOC typically requires providing business owner details, gross revenue figures, bank account information, and documentation on the commercial property being used as collateral.
What Is a Commercial Equity Line of Credit?
A commercial equity line of credit (CELOC) is a type of credit offered by banks and other lenders that allows businesses to use their commercial property as collateral for financing needs. These credit lines work in a similar way to other lines of credit. Rather than receiving a large lump sum up front, a successful applicant is approved for a maximum amount and can then take out funds up to that max at any time. They pay back (and owe interest on) only what they’ve borrowed.
A commercial equity line of credit, sometimes called a commercial real estate line of credit or commercial property line of credit, is generally secured by commercial property. In the event that the CELOC borrower defaults on the loan, the bank or lender can seize and sell that asset to cover the remaining balance.
Lines of credit can be useful because sometimes you may need some cash now and some later – with a lengthy renovation project, for example. This way, you won’t have to take out multiple small business loans if you need more money over time. You can simply borrow against your line of credit.
CELOC vs Commercial HELOC
A CELOC is extremely similar to a home equity line of credit (HELOC) that’s taken out by a business rather than a homeowner, using commercial real estate as collateral. Besides the difference in the type of collateral used, the terms set for a CELOC may be more stringent than they are for HELOCs, since typically the amounts involved are greater. But otherwise, a CELOC (or commercial HELOC) works similarly to a conventional HELOC.
CELOC vs Commercial Equity Loan
A CELOC and a commercial equity loan both use the equity your company has built up in a commercial building to secure funding.
If you’re approved for a CELOC, you have access to a preset amount of money that you can draw on during your draw period. You pay interest only on what you take out and can replenish the funds available to you by repaying what you’ve borrowed. Interest rates are typically variable.
With a commercial equity loan, you generally receive your funds in a lump sum up front and then begin making payments on a predetermined schedule to repay the loan (with interest).
Recommended: Long-Term Small Business Loans
How Does a CELOC Work?
To qualify for a CELOC, a business must own commercial real estate with sufficient equity. Lenders typically require a comprehensive appraisal of the property to determine its current market value. The amount of credit available is usually based on a percentage of the property’s appraised value, minus any existing mortgages or liens. Businesses must also demonstrate a stable financial history, adequate income, and a good credit score to gain approval.
Once approved, the lender establishes a credit line up to the approved amount. The business can draw on this line of credit as needed, up to the maximum limit, during the draw period (usually five to 10 years). The funds can generally be accessed through checks, a credit card linked to the account, or online transfers. After the draw period, there may be a repayment period (often 10 to 20 years) during which any remaining balance and interest are repaid. Alternatively, in some cases the borrowed funds plus interest may need to be repaid immediately.
CELOCs typically have variable interest rates, which are tied to a benchmark rate such as the prime rate. Interest is charged only on the amount borrowed, not the entire credit line. Repayment terms can vary, but generally include monthly interest payments and a minimum principal payment.
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Types of Property for Your Collateral
When you want to secure a commercial property line of credit with commercial real estate, it can be a good idea to check with the lender to confirm the types of property they will accept.
Common examples of what kinds of commercial property may be included:
• Office
• Retail
• Warehouse
• Multi-family
• Light industrial
• Mixed-use
Pros and Cons of a Commercial Equity Line of Credit
Like any type of small business financing, a commercial real estate line of credit comes with benefits and drawbacks.
Pros
• Access to cash when you need it over time
• May have lower interest rates than business credit cards
• Can help with cash flow during slow seasons
• Allows you to leverage business opportunities when they arise
• Can help build business credit if you make on-time payments
Cons
• Interest rates may be high, depending on your credit scores, annual revenues, and the value of your property
• There may be extra fees, like for appraisals or annual maintenance
Recommended: Types of Small Business Loan Fees
Commercial Equity Line of Credit Uses
You can use a commercial equity line of credit for nearly anything that pertains to your business. A few examples of situations in which a CELOC could be useful include:
• To cover gaps in your cash flow when you’re waiting for clients to pay you
• To pay for a larger inventory order so that you save what you spend per item
• To use for payroll, office expenses, office equipment, or remodeling (instead of working capital loans, for instance)
Recommended: What Is Working Capital?
Who Is a Commercial Equity Line of Credit Good for?
If you need short-term financing and expect to need funds over time rather than all at once, a line of credit could be an option to consider. Whether you have a slow period that you need to cover expenses for or are looking for capital for a real estate investment, a CELOC can provide ongoing access to cash that is available when you need it.
Qualification Factors
Each lender will have slightly different requirements for applicants, and some require you to have been a bank customer there already for at least six months.
Getting your finances in order is a good first step if you are interested in applying for any small business loan, including a line of credit. Lenders may require businesses to have a certain yearly revenue or time in business, and you may be asked for your profit and loss statement, tax returns, or other financial documents.
Additionally, lenders may require applicants meet a minimum credit score requirement.
But one of the most important qualifications is the collateral. Generally, the higher the value of the commercial real estate you’re using for your asset, the more funding you will qualify for.
Recommended: SBA Loans
Where to Find a Commercial Equity Line of Credit
Start simply by seeing if the bank you already do business with offers a commercial equity line of credit. Since some lenders require CELOC borrowers to be existing customers, this may be an important consideration.
But that’s not your only option. There are also lenders who specialize in commercial equity lines of credit, and some online lenders may be more willing to work with you if you have less-than-stellar credit. Potential borrowers with a credit score on the lower score of the spectrum, however, may end up with a higher interest rate.
The Application Process
Before applying for a line of credit, it can be smart to calculate how much you need, both immediately and down the road. Next, review your cash flow to see how long you can operate with what you have, then determine how much you want to ask for.
Keep in mind that you will be paying on your CELOC as soon as you borrow from it. As you repay the funds, it frees up more of your line, so you may not need a line of credit for as large a sum as you might originally assume. A more moderate sum may suffice if you continually pay back some or all of what you’ve used before taking out more.
Applications will generally ask for some basic information about both you as the business owner and the business itself, including:
• Name, address, phone number
• Date the business was established
• Employer identification number or Social Security number
• Name of all owners and their personal details
• Gross revenue
• Details on bank accounts and current loans
If you are using your commercial property as collateral, you may also be required to provide details on it, including:
• Property type
• Address
• Current market value
• Loan balance if you have a mortgage on the property
Depending on lender requirements, you may be asked to submit additional financial documents: These can include:
• Business and personal tax returns
• Balance sheet
• Profit and loss statement
• Schedule K-1
• Personal financial statement
Finding A Commercial Equity Line of Credit
If you own commercial property and need access to working capital, you may be able to leverage your asset with a commercial equity line of credit. Be sure to shop around, as interest rates and terms can vary from one lender to another based on your qualifications.
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FAQ
What is a commercial equity line of credit?
A commercial equity line of credit gives you access to working capital, and you can borrow up to your maximum approved amount. You pay back only what you have borrowed plus interest and can continue to borrow against that line over time.
Can you take a HELOC on commercial property?
Generally, HELOCs are for primary or secondary residences, and some investment properties. If you want to draw on the equity of a commercial property, it’s more typical to use a commercial equity line of credit (CELOC).
Can I get an equity line of credit?
If you own commercial real estate that can be used as an asset and meet a lender’s qualifications, you may be able to get an equity line of credit for your business.
Is an equity line of credit a good idea?
An equity line of credit can be one solution for business owners who have commercial real estate they can leverage as collateral and who need access to funds over time rather than all at once.
What are the typical rates and fees associated with a CELOC?
Typically, a commercial equity line of credit (CELOC) charges a variable interest rate on the funds you withdraw. It may also come with a variety of fees, which could include appraisal fees, annual maintenance fees, draw fees, and more.
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