Commercial Loans – Cost Effective Way of Funding Business Needs

When your little idea, your dream starts taking a real shape – you know it is time you garnered your finances to make it grow. At times your effort fall short and there you are filing for loans. Commercial loans can help business interests with uninterrupted capital supply.

Commercial loans can be used to buy business premises or commercial building for both new or establish businesses. They can be used to buy any business asset or to finance the expansion of any established business.

Different commercial loans lender have different way of processing commercial loans. You can start with pre-qualifying for commercial loans. This determines how much as a borrower you can afford as commercial loans and which commercial loans programme will suit the best.

Commercial loans are the biggest way of financing business projects. While providing you with commercial loans, the loan lender will look at general information as your income and existing debts. Your application will be reviewed by a loan officer.

Commercial loans lender will take keen interest in

o Credit history

o Reason for loan

o Collateral

o Ability to repay

o Your investment in the business

Documents to gather while applying for commercial loans are –

Loan request – the amount of loan requested, how the funds will be used, loan type and amount of working capital on hand. Commercial loans lender will feel more secure knowing that you have invested your own money in the commercial plan.

Business plan – If the commercial loans are used for starting a new business, the business plan is crucial. It should include cash flow projections for first 24 months. Information should be concise and clear. Its feasibility will be fundamental in getting commercial loans approved.

Personal financial statements – In case commercial loan is used for expansion of business, it will be required for you to give business profile. Personal financial statements would be required for anyone who owns 20% or more of business. Complete information about current debts balances, payment schedules, maturity, and collateral used to secure other loans. You can be required to provide more documents during the loan process.

In case you are purchasing real estate, you might be required to submit preliminary environmental reports, area maps, title reports, property appraisals, and lease summaries.

Decisions for commercial loans take usually 1-5 days. During this time, you might be required to give further information. Commercial loans broker can help you submit your loan application to several lenders for approval. Your job is to select the most attractive offer and returning the final letter of intent. After all the conditions are satisfied, the commercial loans are approved and the lender will give a final loan commitment. At the closing, the commercial loan will be transferred with a cashier’s check, draft, or electronic wire transfer.

Commercial loans are either secured or unsecured – with or without collateral. Secured commercial loans are more commonly available as commercial mortgages. Commercial mortgage are provided at better terms, interest rates and repayment options. Commercial loans are available with fixed and variable rate options. Fixed rate commercial loans will mean that your interest rate and monthly payments will be fixed at the beginning of the loan and will remain so throughout.

Businessmen apply for fixed rate commercial loans for it helps in effective financial planning because they know how much they are giving out every month. With variable rate the interest rates changes in accordance to the changes in the market. The benefit with variable rate is that they start with lower interest rate than fixed rate. But interest rate can increase during the term and therefore you will have to pay more. On the contrary fixed rate commercial loans will leave no space for change in case the interest rates drop.

Investigate before you make a commercial loan claim. Be prepared to answer some questions. Commercial loans are cost effective way of funding business needs when you need it. Commercial loans can strengthen your competitive position; increase your working capital and maximum profitability. Investigate your opportunities with commercial loans and see how your business becomes a commercial success.

Commercial Loans and Working Capital Lenders to Avoid

Avoiding critical problems is vital for a small business owner seeking help with commercial loans. Successful working capital management especially requires that problem lenders be avoided for business loans and commercial mortgage financing.

One of the most serious commercial loan situations is a small business commercial lender that causes problems for their commercial borrowers on a repeating basis. Commercial borrowers should be prepared to avoid certain problematic commercial lenders unless alternative working capital loan options are impossible.

This article will not name specific lenders to avoid. This article will focus on how important it is to avoid lenders that cause the problems described below. We will provide several examples to demonstrate why commercial borrowers should be prepared to avoid a number of commercial lenders when seeking commercial mortgages and small business financing.

I have been advising business owners for many years, and I have encountered many commercial loan situations which have involved commercial lenders that I would not recommend as a result. This conclusion is typically based on an obvious pattern of lending abuses by select business financing providers.

As a first example of lenders to avoid, I have published an article which discusses the tendency of many banks to say “yes” when they mean “no”. Such banks will typically attach onerous business financing conditions to commercial loans instead of simply declining the loan. Business owners should explore other commercial mortgage alternatives before accepting commercial financing terms that put them at a competitive disadvantage.

The second example of lenders to avoid involves the commercial appraisal process. For commercial mortgage loans, commercial appraisals are an unavoidable part of the commercial loan underwriting process. The process to obtain commercial appraisals is expensive and lengthy. Avoiding commercial lenders which have displayed a pattern of problems and abuses in this area will benefit the commercial borrower by saving them both time and money.

The third example of lenders to avoid is illustrated by those which provide worthless pre-approvals for commercial loans. Many borrowers think it is important to obtain a business loan pre-approval. The apparent result of the preliminary business financing approval is that it will allow the borrower to make other business commitments which are dependent on the commercial mortgage being approved.

Commercial borrowers should expect that a valid approval will not be regularly issued in a day or so. Any form of commercial financing approval will be treated as a binding action by ethical lenders. Nevertheless there are commercial lenders who provide their own special version of a pre-approval within just a few days of receiving preliminary application information. Because this abbreviated approach to pre-approvals almost always produces unexpected surprises for the commercial borrower as the business loan process goes forward, commercial borrowers need to be extremely wary of any commercial lenders that take this approach.

Why would a lender use a questionable commercial loan pre-approval? Here are two primary possibilities. The first reason is to employ a pre-approval process that resembles the approach used for residential mortgage loans. A second reason is to cause borrowers to prematurely end their financing search due to the often false hope created by an artificial approval.

Since many commercial mortgage loans are arranged by residential mortgage brokers who are frequently unfamiliar with common commercial loan procedures, this reason will be especially applicable when dealing with commercial lenders that specialize in dealing with residential mortgage brokers. This type of commercial lender should be avoided at all costs for most business financing situations.

The fourth example of lenders to avoid is related to lack of sufficient lending competition. It is not unusual for the leading small business lender in some markets to use more restrictive commercial loan terms. Such lenders often take advantage of a lack of other local commercial lenders. It is not wise for borrowers to rely upon local and regional banks for most business financing requirements. A non-local lender can frequently provide better business loan terms for most lending scenarios because they are routinely competing with other business lenders.

Commercial Loan Refinance – Timing is Critical

We are often are asked when is the optimal time to refinance a commercial real estate loan. Many factors such as market interest rates, prepayment penalties, existing loan terms and the overall goals of the borrower come into play. There are however no set answers, but below are some real world thoughts on how you might analyze your own commercial refinance.

Traditionally, the analysis to keep an existing loan in place or to refinance into a new commercial loan can become very complex. Financial advisors like to use the Discounted Cash Flow method which essentially compares the two loans on the Net Present Value basis.

We have found though, that most commercial building owners are primarily interested in how the proposed loan will:

1. Affect their monthly cash flow.

2. What the closing costs will be and how these costs will affect their equity.

3. What the out of pockets costs will be.

4. How long will it take for the increase in cash flow to “pay back” the owner.

Principal pay down is obviously another important component of any commercial loan. However, for most owners, especially those with highly leveraged properties, cash flow is more pressing than above. This is due to the relative high debt payment versus net cash after all the expenses have been paid.

Example 1. Owner occupied office building.

Borrower is 3 years into a 5 year fixed, 20 year amortized loan and is considering refinancing into a 30 year fixed, 30 year amortization commercial loan. The borrowers primary motivation is a desire to increase cash flow to help businesses overall profitability. In addition the borrower has concerns over future rate increases when the existing loan balloons

Existing Loan – 5 year fixed 20 year amortization.

Property Value $1,500,000

Current Loan Balance $1,075,000

Original Loan Balance $1,125,000 (Purchased building with 25% down)

Current Loan to Value 72%

Current Equity 28% or $420,000

Interest Rate 7.25%

Monthly Payment $10,418

Proposed Loan – 30 year fixed, 30 year amortization. Borrower is planning on rolling as much of the closing costs as possible into the loan amount to reduce “out of pocket” cash.

Property Value $1,500,000

Current Loan Balance $1,075,000

Closing Costs $19,638

Proposed Loan Amount $1,094,638

Proposed Loan to Value 73%

Interest Rate 8%

Monthly Payment $8,582

* Closing Cost Break Down (Title at $2000, Lender Legal Fees $2000, Origination Fee at 1% or $10,838, Appraisal $3,000, Environmental $1,800).

Increase in cash flow is $1,835 per month or $22,028 annual. Essentially, from a cash flow perspective, the borrower would recoup the costs of loan in less than one year, despite the rate increase by 75 basis points. Although the borrower would have to pay for the appraisal and environmental report upfront, they would be “refunded” for these costs at close if desired.

In our experience most business owners would be very interested in pursuing the proposed refinance.

Example 2. Investment Property, 10 Unit Retail Center.

Borrower has owned the property for 7 years and has two loans on the subject property. First loan is a conventional floating rate loan that adjusts annually, amortized over 25 years and the second is seller held. It is amortized over 20 years and has a fixed 20 year rate. Neither loan has a balloon provision; however the first loan does have a prepayment penalty of 5% of the remaining loan balance, which is in effect for 3 more years.

Property Current Value – 9% Cap $2,600,000 (Purchase for $2,300,000)

Combined Current Loan Balance $1,635,000

Original Loan Balance, 1st $1,610,000 (70% Loan to Value)

Original Loan Balance, 2nd $230,000 (10% Loan to Value)

Current Loan to Value 61%

Interest Rate, 1st 6.65%

Interest Rate, 2nd 7%

Current Debt Coverage Ratio 1.27

Net Operating Income $235,000

Combined Monthly Payment $15,448

Proposed Loan – 10 year fixed, 30 year amortization. Borrower is planning on combining the two loans together and wants the security of having a fixed rate loan. Borrower also wants to roll in as much of the closing costs as possible into the loan amount to reduce “out of pocket” cash.

Property Value – 9% Cap $2,600,000

Combined Current Loan Balance $1,635,000

Closing Costs $83,500 *

Proposed Loan Amount 1,735,568

Proposed Loan to Value 67%

Interest Rate 7.5%

Current Debt Coverage Ratio 1.54

Net Operating Income $235,000

Monthly Payment $12,743

Closing Cost Break Down (Pre Pay $72,500 [5% of 1st loan amount], Title at $3000, Lender Legal Fees at $2,200, Origination Fee at 1% or $17,185, Appraisal $4,000, Environmental $1,800) .

Cash flow increase is $2,704 per month or $32,449 per year while the cost to close the loan is high at $83,500 due primarily to the prepayment penalty. The borrower is facing a closing cost payback period of over two and a half years. In addition the interest rate has gone up considerable on the proposed loan, which of course increase the overall cost of the loan.

Not an easy decision for the borrower. The option to go forward would probably rest heavily on the borrower’s opinion of where the future interest rates will be when the prepayment period ends.

It is interesting to note that the borrower would be able to increase his loan amount to $2,333,964 (cash out proceeds would be approximately $598,000) if he choose too. This is due to the increase in cash flow. The building Debt Coverage Ratio would improve to a 1.54 – the typically minimum is DCR is 1.2. If the borrowers intent was to pull cash out of the property to inject into another property (or for any other reason) this would probably be a much easier decision to go forward with the loan.