Unless you have access to millions of dollars in cash, you will almost certainly need real estate loans for businesses before you start your cannabis company. That applies when you want to use real estate business loans to buy farmland, warehouse space for indoor cultivation, or retail space where you can provide a comfortable experience for patients and customers.
Qualifying for affordable commercial real estate loan rates doesn’t happen for everyone. If you struggle to find real estate loans for investors that leave you with enough room to generate profits, you might need to take these five simple steps to qualify for better real estate loans.
1. Check Your Credit History for Mistakes
Most Americans think that they can rely on credit bureaus to provide accurate information about their credit histories. Despite that, about 20 percent of Americans have mistakes on their credit histories. It’s an incredibly common problem that can prevent you from accessing real estate loans for businesses.
Before you apply for a loan, get a free copy of your credit report and scour it for incorrect information.
Federal law requires each of the three major credit bureaus – TransUnion, Equifax, and Experian – to give you a free credit report each year upon request. That means you can get three free copies per year.
Do yourself a favor and check your credit report from each company. They can record different information. One report might show that you have a perfect credit history. Another could show that you have a history of missed payments.
If you find inaccurate information, get the items removed by contacting the company that reported it. If that doesn’t work, reach out to the credit bureau to start an investigation. It can take months to complete, so start well before you plan to apply for a loan.
2. Work Toward Improving Your Credit Rating
Your FICO score provides a snapshot of your credit health. Most financial institutions and private lenders use the number to determine how much risk they assume when lending you money. The higher your score is, the less risky you seem.
You will want a Very Good (740 to 799) or Exceptional (800+) FICO score to qualify for real estate loans that have low interest rates.
You might get real estate loans for businesses with a lower score, but you will pay a much higher interest rate, which makes it harder for your cannabis business to generate profits.
3. Save Money so You Can Offer a Larger Down Payment
Many lenders will require a down payment before approving real estate loans for investors. The typical bank, for example, wants a 20 percent down payment. If you cannot pay 20 percent of the property’s cost, then you can expect to pay extra for private mortgage insurance that protects the lender from loss.
As someone who wants to borrow money to purchase cannabis real estate, you cannot turn to a bank or credit union for help. As long as cannabis remains illegal at the federal level, most financial institutions will not risk upsetting the government by working with cannabis cultivators and dispensaries.
Private lenders, however, also use down payments to lower risk and ensure that you take the arrangement seriously. They might offer to loan you 100 percent of the cost, but you will pay a higher interest rate.
Save money until you can provide a larger down payment that lowers the overall amount of cash you borrow and helps you lock in a lower interest rate.
4. Use Your Existing Assets as Collateral
People who invest in real estate loans want to make sure you can make your monthly repayments on time. No matter how attractive your application looks, though, you still represent some risk since there’s always a chance that your business will not succeed.
Put the lender’s mind at ease by using your existing assets as collateral. If you own a home, you can list the property as collateral for the loan. You could also list vehicles, business stock, equipment, and other types of property.
Keep in mind that collateral will increase the chances that you get a low-interest loan, but it could also mean that you lose property when you fail to repay the loan. You have some protections, but you could lose your home when you list it as collateral on a business loan you cannot repay.
5. Compare Real Estate Loan Options to Find a Lower Rate
Real estate loans are just like any other commodity. Some companies charge higher (or lower) prices than others. It pays to shop around before you accept any real estate business loans. With lower commercial real estate loan rates, you could save hundreds of thousands of dollars over the next several years.
Let’s say you get a $1 million loan with a 10-year term and charges a 15 percent interest rate. Each month, you will repay the lender $16,133. At the end of 10 years, you will have spent more than $936,000 on interest!
Now, imagine that you get the same loan at 7 percent interest. Your monthly payments drop to $11,611. More importantly, your overall interest falls to $393,302. You save over half a million dollars by finding a loan that charges a lower interest rate.
Every interest point matters when you borrow money. Even a 1 percent difference can cost you more than $50,000.
While you should always take time to compare your real estate loan offers to make sure you save as much as possible, you also need to choose a reputable lender. If a company has a reputation for bad customer service, you might want to avoid them even if it means spending a little more money going with a different option.