Looking for ways to raise working capital for your new business? Or a financing loan that raises commercial capital for a business that’s been doing well, so you can expand into more markets? Either way, raising the money needed without tapping into reserves your company counts on for a rainy day is a complicated task for many owners. It gets easier when you identify collateral you can use as the basis for a loan, because collateral goes a long way toward mitigating lender risk. That’s why it’s often easier to find a loan for a building when you’re opening up than it is to get a working capital loan once you’re profitable. Many owners expect capital loans to be unsecured. There are some that are, but by and large they are more expensive than secured loans and they have much more stringent approval criteria.

Why Use Real Estate as Loan Collateral?

There are a few benefits to using a piece of real estate to secure a loan. First of all, it opens up a lot of options, from hard money loans with short repayment windows to refinancing loans that have the same long terms as other commercial property loans. You can even find equity-based credit lines that allow you to tap into commercial capital as needed, if you look for them. Another reason to pick real estate? It tends to have a high value, which means you can typically get a large sum when refinancing. If you own the property outright or you’re financing the equity in it, you may not even have up-front loan costs, since the building already has the equity you’d be purchasing with a down payment when using those same loan types to acquire the property. That’s ideal for a situation where you just need working capital.

Picking the Right Loan Type

The cost of capital is one of the biggest considerations when taking out a loan for commercial capital, because that cost winds up translating into overhead for your business, making it harder to achieve a return on your money when compared to using funds from income or cash reserves. Efficient loans that minimize the cost of capital to your business increase overhead the least, and the right one for a given situation may not be the one you used last time. Look at how long you’ll need to wait for a return, as well as prepayment penalties and other additional costs that may affect your total set of expenses related to the loan. That way, your comparison is as comprehensive as possible.