Commercial Equity Lines of Credit: Rates, Requirements, and How To Tap Property Equity for Business Growth

Comparing CELOCs, HELOCs, and Business Lines of Credit

There are a few financing options with similar names/concepts that I want you to understand the differences between.

A CELOC, as I've begun to explain, is when you borrow against a commercial property that you own for business purposes. A HELOC, on the other hand, is an acronym for a home equity line of credit. It's similar to a CELOC, except that your personal home is what's securing the borrowed capital rather than your commercial property.

A third and similarly-named business financing option is a business line of credit. These are often unsecured, meaning you don't necessarily need to put up an asset as collateral. Qualifying for one is instead more based on creditworthiness and your business's performance, revenue, cash flow, and financial history.

CELOC

HELOC

Business LOC

The differences in collateral in these three financing options ultimately affect the application process, rates, borrowing limits, and general borrowing terms.

With a CELOC or HELOC, lenders look at the property's value and how much equity you have in it, using an LTV (loan-to-value) limit to help determine how much you can borrow. (You'll typically need to provide property documentation and may need an appraisal.) And because real estate gives the lender collateral to fall back on, a CELOC or HELOC can sometimes offer lower rates than an unsecured business line of credit.

An unsecured business line of credit doesn't have a property-based LTV or require a real estate appraisal. Instead, as I mentioned before, the lender determines your credit limit and rate primarily based on factors like your revenue, cash flow, and creditworthiness.

How To Know When a CELOC Is the Right Move

Just because you have equity in a commercial property doesn't necessarily mean you should use it as collateral when borrowing.

In general, I think a CELOC makes the most sense when you need flexible access to money over time, the expense justifies putting your property up as collateral, and you have enough equity to qualify. For example, it may be the right financing path for your business if you need to:

Handle unexpected costs

Keep reusable borrowing capacity available when you know expenses are coming but don't know exactly how much you'll need or when

Bridge a slow season

Access cash as needed to cover operating expenses during a predictable seasonal slowdown, then repay it as revenue picks back up

Buy inventory

Finance inventory purchases without using up the cash you need for other operating expenses

Expand your business

Draw capital at different stages of an expansion rather than borrowing the entire project cost at once

Improve your property

Pay for renovations, repairs, or other improvements to commercial property you already own

Consolidate higher-cost debt

Potentially replace higher-cost business debt with lower-cost financing, when the numbers, including fees, actually result in savings

A business line of credit may be a better fit if:

• You do want revolving access to capital, but don't feel comfortable putting your commercial property on the line, don't have enough equity in your commercial property right now, or don't have a commercial property at all

• You have a smaller or shorter-term financing need

• You want and think you can qualify for financing that's based on your business's revenue, cash flow, creditworthiness, and financial history

An SBA 7(a) loan may be a better fit when:

• You don't necessarily need revolving access to money where you're repeatedly borrowing, repaying, and redrawing funds

• Your need is for a large, long-term investment

• You want a longer-term repayment plan and are okay with a lengthier approval process

• You want to fund multiple types of expenses in one loan (for example equipment, working capital, expansion, or eligible real estate costs)

A conventional term loan might be a better fit if:

• You know exactly how much you need for a defined, one-time expense and don't really need a revolving source of money

• You need a lump sum relatively quickly and don't want to go through the more involved SBA application process

• You're willing to accept a potentially shorter repayment term or higher cost than SBA financing in exchange for a simpler or faster process

• You don't qualify for SBA financing or your intended use of funds isn't eligible under the SBA program

How Much Does a CELOC Really Cost?

As I mentioned earlier, the amount you can borrow with a CELOC depends on your commercial property's value, how much (if anything) you owe on it, and a lender's specific loan-to-value (LTV) ratio. It's common for CELOC lenders to cap the total borrowing amount at about 65% to 75% of the property value, though this can vary.

Here's a hypothetical example: Let's say your commercial property is worth $1 million. You've been paying a commercial mortgage on it for many years, and still owe $500,000. With a 75% maximum LTV, the property could support up to $750,000 in total debt secured by it. If you subtract what you still owe on the mortgage, $500,000, that means you could potentially have up to $250,000 in additional borrowing capacity.

CELOC Interest Rates

The tricky thing about many CELOCs is that the interest rate you pay isn't necessarily fixed while your line is open. Unlike some other types of loans where you lock in a certain rate for the duration of the term, CELOC rates are often variable, which means they can rise or fall.

Rates are usually tied to a benchmark, like the prime rate, plus a lender-specific margin. But because they're variable and lenders price CELOCs individually (based on factors like your creditworthiness, property, LTV, and business finances) it's hard to tell you a reliable “average” rate to expect.

To give you an idea of how the rate affects your actual cost, let's say you draw $50,000 from a CELOC. If your rate is 9% for the first six months and then increases to 10% for the next six months, carrying the full $50,000 balance for the year would cost about $4,750 in interest, before fees. (That's just an illustration; your actual cost will depend on how your benchmark rate changes, how much you draw, and how quickly you repay it.)

Fees and Closing Costs

Using real estate as collateral, as is the case in a CELOC, means you might have some more up-front costs and/or fees than you would with other types of unsecured loans. Depending on the lender, you might have to pay appraisal fees, origination fees, application fees, legal fees, and other closing costs. Be sure to clarify these details with your lender before finalizing your CELOC.

What Lenders Will Look For

When you're applying for a CELOC, lenders are going to assess several factors about your business to both make a decision on whether they will lend to you and, if they do, the terms of what they're offering. Those factors can include:

Why Business Owners Work With Clarify

Clarify Capital's 5.0 Trustpilot rating is the highest in the industry, and we've placed more than $1 billion across 50,000+ small-to-midsize businesses (SMBs).

We don't offer CELOCs at Clarify, but we do support business owners looking for business HELOCs, business lines of credit, SBA loan options, term loans, and more.

Minimum Qualifications

For Financing Through Clarify Capital

$10,000 in monthly revenue

Your business must earn at least $10K per month in a business bank account.

500+ credit score

You can get approved with any credit score. But the better your credit rating, the better interest rates lenders offer. Your FICO score should be above 500.

Minimum six months in business

Your company should be operational for a minimum of six months. This shows business lenders that your company is sustainable and won't go out of business.

Have a business bank account

Your Clarify advisor will need three or four months of your most recent bank statements to verify income. This is just to see you're actually making $10K+ month in revenue.

Start Application

We match you across 75+ vetted lenders and can get you a written offer in as quickly as 24 hours. Every applicant works with a U.S.-based lending advisor (not a chatbot or a call center) from application through financing.

Here's how the application process works through Clarify Capital:

Step 1:Apply online

It takes about two minutes. You'll need your business's legal name, EIN, time in business, monthly revenue, requested loan amount, owner contact information, and a credit authorization.

Apply here

Step 2:Connect with a lending advisor

A U.S.-based Clarify Capital lending advisor reviews the application, runs a soft credit pull (no impact to your score), and requests 3 to 4 months of recent business bank statements.

Step 3:Get matched and funded

Clarify Capital works with 75+ vetted lenders and matches your profile with the right financing. Approvals often get a same-day offer (SBA loans can take longer).

If you're ready, my team and I at Clarify Capital can help you explore the best financing options for your specific situation. Get started and apply today.

Frequently Asked Questions

Here are answers to common questions I get about CELOCs and other similar types of financing.