When financing your Purchase of a Commercial, Business, Investment, development, or industrial property there are many potential sources. Each type of property will have different “lender rules”, which is an important criteria to keep in mind.
In general, most of these properties will require a down payment from the Buyer in the range of 30-40%. In the case of vacant land, it will be in the range of 50%. One exception is the purchase of residential units, such as a duplex right up to larger apartment buildings. Even though these properties are investment properties they will qualify under residential lending criteria.
Canada Mortgage and Housing Corporation and Genworth are Government backed insurance companies, which insure high ratio loans in Canada against default of the borrower. The loans are insured in favor of the bank, and its depositors. High ratio loans are any loans which exceed 80% of the Loan to Value Ratio. In regards to investment properties, these lenders will only consider residential investment properties, as mentioned above. This type of financing is available through most Chartered banks.
Generally this refers to Canada’s larger banks such as CIBC, RBC, TD, Scotia Bank, RBC and National Bank. As a long term client of any of these banks, people tend to feel that financing a business is a simple and easy task. It is not. Most of these banks do not have an appetite for traditional commercial lending at present, especially for a new business owner, despite credit.
However, these institutions do have one lending product which may be of some practical use when purchasing; it is called the “SBIL” program. Small Business Improvement loan is similar to the insured loans for residential investment properties. Presently this loan amount can be to a maximum of $500,000.00. It can be used for the purchase or expansion of a business and can consist of land, buildings, chattels, and fixtures, but this program will not finance the goodwill portion. The amortization (payback) of these loans is usually to a maximum of 10 years, which does make the monthly payment higher.
BDC (Business Development Bank)
The BDC is a Government owned bank. This bank operates similar to the chartered banks with similar lending criteria, if not more stringent. The BDC has a great interest in businesses which create employment, manufacture, export, or seek to hire aboriginal peoples. The bank tends to seek a more “hands on” or mentoring approach. Many tourist business in our region would not be a candidate for BDC financing and has not been considered a practical lender in many parts of Ontario.
Private and Seller financing
Private financing has been a great source for the Purchasing of business in this region. Over the last 25 years we have developed a network of investors for this purpose. Every investor is different, but generally speaking they are “equity investors”. Most do have a concern as to how the loan will be repaid, and will want to see a business plan, historical revenue and expenses. However, their primary concern is the amount of equity in a property (downpayment). The interest rates will be higher than most banks and there is a Lenders fee attached to the written commitment, but this type of loan is more readily available most times, with far less “red tape”.
Seller financing is commonly referred to as “Seller take back, or Vendor take back financing.” When a Seller sells their property, they may be able offer a first or second mortgage back to the buyer. In these cases, the interest rate is usually lower, and an appraisal ($2,500-$6,000) can be avoided.