There are approximately 25 critical differences between residential real estate investing and commercial property investments. Because more investors are exploring business finance opportunities, this report is designed to help educate new commercial borrowers about key issues involving commercial mortgages and commercial loans.
Environmental requirements for business finance will be a complex issue for numerous business investments. Environmental issues involved in a business loan will primarily depend upon the commercial lender as well as the type of business. More extensive requirements can impact both the cost and timing for a commercial mortgage loan.
Tax returns and financial statements for a business loan are likely to be a concern for all commercial borrowers. In comparison to residential loans, business financing usually involves lender analysis of business tax returns in addition to personal tax returns. Business financial statements and personal financial statements will be required for certain kinds of business opportunity financing and commercial real estate financing.
Secondary financing will often be a means of acquiring desired commercial loans. The use of seller financing or secondary financing is a prudent business financing strategy to reduce capital requirements for the borrower. Secondary financing will not be accepted by all commercial lenders.
An unexpected requirement for many commercial loans involves sourcing and seasoning of funds. When purchasing a business, some lenders will require that borrowers document where the down payment is coming from (sourcing) and how long the funds have been in that location (seasoning). If a borrower cannot adequately provide this documentation, the choice of commercial lenders will be more restricted.
Collateral and cross-collateralization for business loans will be an insurmountable obstacle for some commercial borrowers. Collateral requirements for business financing will depend on many factors such as down payment, type of business, credit scores and the type of financing needed. Cross-collateralization refers to lender requirements involving personal collateral such as a home used as collateral for a business loan.
Any requirement for a business plan when obtaining commercial mortgages is likely to be expensive and time-consuming. A business plan is not always required for a business loan, but when one is required this will add significantly to the cost and length of the loan process.
An increasing problem for commercial borrowers seeking refinancing is an unreasonable limitation for getting cash out of the new loan. Commercial lenders differ significantly regarding restrictions imposed on the amount of cash out to the borrower when refinancing. Some lenders will not permit any cash out whatsoever while others will limit cash received by the borrower to a particular amount. The preferred approach is to use a lender that will allow cash to be paid out up to an agreed loan-to-value (frequently 75%).
It is important to to thoroughly analyze business financing lockout penalties. A lockout penalty is much more severe than a prepayment penalty in that such penalties can effectively prevent a commercial borrower from selling or refinancing during a prescribed period (often two to five years).
In addition to the issues noted above, numerous other key business finance and real estate mortgage issues will also be important to evaluate. Commercial mortgage requirements are very different from residential financing requirements in the United States. We have prepared several other business finance overviews addressing additional factors that will be significant for most commercial borrowers. Separate report topics include SBA loan refinancing, business opportunity financing, stated income business loans and commercial appraisals.
There are approximately 25 critical differences between residential real estate investing and commercial real estate investing. Because more residential real estate investors are exploring commercial real estate and business finance opportunities, this business opportunity financing and business loan report is designed to help educate new commercial investors about key commercial mortgage and commercial loan issues.
Business Loan Programs for an SBA Loan
The availability of SBA loan programs is an important and useful aspect of many business financing strategies. There are also critical limitations and potential problems with Small Business Administration business finance programs. Some commercial borrowers will benefit significantly from SBA loan financing, and it is equally likely that many business borrowers will either not qualify or should avoid such business loan programs.
Business Opportunity Business Loan Options
Financing to buy a business opportunity is frequently complicated because real estate is not included in the financing of the business purchase, and normal business financing is not feasible. There will be fewer prospective lenders, and requirements such as length of loan will be materially different than with a commercial property loan.
Commercial Mortgage Balloon Payment Terms
Business lenders will sometimes use balloon payment conditions instead of offering long-term business financing. If a lender imposes balloon payment requirements, a business owner will have a large lump-sum payment due after a short initial payment period. When the balloon payment is due, a business owner will be forced to either refinance their business finance loan or sell their business if making such a large payment is impossible.
Short-Term and Long-Term Business Finance Options
Long-term commercial mortgage coverage is normally offered by only a few specialized commercial lenders. Business opportunity business loans are typically limited to ten years. Commercial loan terms will be restricted to a three-year period or less by many local and regional banks.
Recall Provisions for a Commercial Mortgage Business Loan
A recall clause is one of the least desirable business finance terms offered by a business lender. If a business loan agreement includes such terms, a lender is permitted to require early repayment of the commercial mortgage under specified conditions. The terms which can cause the lender to call the commercial loan will vary but will commonly include periodic lender review of financial statements, tax returns and credit history.
Thinking Outside the Bank for Commercial Mortgage Lenders
Local and regional banks are not likely to be the best commercial lenders for business opportunity loans and commercial mortgage loans. Traditional banks have recently served a reduced role in most business finance circumstances and are even more restricted in successfully working with specialized business financing situations. Almost all commercial loan scenarios are more difficult than residential financing. A practical commercial borrower should insist on lenders established as business finance specialists.
Additional Key Business Finance Issues
Residential financing is significantly different from the business loan environment in the United States. Some critical differences not included in this article will be described in separate commercial mortgage reports. Additional topics include business finance lockout penalty fees, refinancing an SBA loan, business appraisals and stated income commercial financing.
Copyright 1995-2007 AEX Commercial Financing Group and Stephen Bush. All Rights Reserved.
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