Taking out a commercial mortgage is a big decision. The following is a list of questions the business owner as a prospective borrower should ask herself and the lender before going ahead.
How am I going to meet the loan repayment terms?
Normally, bank loans require the borrower to repay the entire business loan much earlier than its stated due date. Banks do this by requiring most of their loans to include a balloon repayment. This means the borrower has to pay interest and principal on a 30-year mortgage at the stated interest rate for the first few years (generally 3, 5 or 10 years) and then repay the entire balance in one balloon payment.
On the other hand, non-bank lenders generally offer simpler/easier credit requirements for commercial loans. These loans, which may carry a slightly higher interest rate, often work like a typical home loan. Whilst some are designed as short term facilities, some allow a steady repayment over longer terms, as long as twenty or thirty years.
How much can or should I borrow?
Most bank loans don’t allow second mortgages, so the borrower should go into the loan process intending to borrow enough to meet current business needs, or enough to sufficiently control real estate investments.
Some non-traditional loans will allow the borrower to make a smaller down payment, maximizing the loan-to-value-ratio (LVR) at 70%. Higher is possible but unusual especially in the current climate. Such loans are generally not bank loans, but are offered by direct commercial lenders or pools of commercial investors.
The number one reason behind the failures of most small businesses is the lack of adequate capital to meet cash-flow needs. Because of this it may actually be safer for a small business to borrow more money at the slightly higher rate.
How long will it take to get a commercial loan?
Unfortunately, it is difficult to secure business loans from most banks. Such loans:
- Contain the most stringent requirements
- Impose the most loan laws
- Take the longest time.
Bank loans go through several phases of review. Normally it takes several weeks before the borrower can get an idea of what is happening. Non bank lenders like Chifley Securities can often close the loan and transfer funds within two weeks to 30 days and offer greater flexibility for approved borrowers.
What conditions are required?
Many borrowers are not aware that much more may be required than simply making regular monthly payments on time. Many loans ask you to provide quarterly or annual income statements, balance sheets and tax returns. Some loans will even require promises that your business will meet certain tests in the future. They may require a certain positive cash flow, or a certain debt-to-cash-flow ratio, or other financial criteria.
What kind of documentation will be required?
Traditional lenders often require three to five years of financial statements, income tax returns, and other documentation. This may include:
- Leases
- Asset statements
- Original corporate documents
- Personal financial records of the business owners
What are the “hidden” or total costs of the loan?
The stated interest rate is often artificially low when one considers all the costs of a loan. Other costs may include:
- Legal fees,
- Survey charges,
- Loan application fees,
- Appraisal charges
Thus, it is important to ask oneself these questions, before deciding to go into the market and look for a possible commercial loan!
About the Author: Dominic Lambrinos
Dominic Lambrinos is a financial expert who provides professional business finance solutions, commercial financial engineering, expert review of financial submissions, negotiation, equity raising, business sales, and trade financing. Dominic is also a sought after finance business trainer, and accomplished public speaker.
Under Dominic’s guidance , his team can also prepare professional financial submissions, review financial statements, provide financial accounting, business administration, development of information systems, marketing and sales skills, computer and Internet sales skills.