The Process Involved in Commercial Loans
It is common for business people to borrow money for the following reasons: money as working capital, money to expand an existing business or money as a leverage equity in a commercial real estate venture. If you’re into one of these mentioned reasons and it’s your first time to apply for a commercial loan, you should have a different expectation as to how commercial loaning works when compared to a real estate commercial loan. In commercial loaning, most lenders ask for a higher interest rate than rates offered in home mortgage loans and some will even go a level higher as to require collateral for huge amount of loan application, like the business worth and the commercial properties owned by the applicant.
Before meeting the loan terms, an applicant must do research on the payment schemes of the different banks, since all bank loans require the borrower to pay the commercial loan much earlier than the due date for reasons that the banks include what is termed as a balloon repayment method, which is a procedure for a borrower, who for example applies for a 30-year loan, is required to pay the principal and interest, spread out for the next few years, maybe up to 10 years, and pay the entire balance in one balloon repayment.
Following this form of payment arrangement, borrowers, who find it difficult to meet up this requirement, may be compelled to take the option of applying for a re-qualification of their loan or re-financing their loan at the end of the balloon term. The risk factors must be carefully weighed out, considering that the entire loan balance is required to be paid in full, to include possibilities of the following scenarios: experiencing a cash-flow problem in the years immediately preceding the balloon term, to which the lender may require a higher interest rate; the possibility of the borrower not to be granted for another loan; the borrower’s properties may be foreclosed for non-payment of the balloon repayment amount. Once these risk factors have been assessed, another option for a borrower is to look at the terms of non-bank lenders who can offer less stringent credit requirements on commercial loans, some of them will offer long-term commercial loans without a balloon repayment but at a higher interest rate than those of the banks.
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When the repayment options have been clearly analyzed by the borrower, the next step is to assess what would be the right amount to be loaned with respect to the borrower’s financial needs, as well as with respect to the bank’s loan terms. It is also imperative for the borrower to evaluate first two considerations: how much cash is the bank likely to grant and how much money should the borrower make available to repay the structured loan. Another point to consider is that bank loans include requirement structures, such as: bank loans prohibit second mortgages, banks will require a down payment of 20-25% based on the amount of loan being applied; loan terms vary depending on the loan amount being applied, as well as the classification of the kind of business of the applicant.The Best Advice on Funds I’ve found