|Facts about Commercial Loans|
Commercial loans are more difficult to get today as a result of the recent financial crisis. The fact is however, there is no shortage of money available, and loans can be obtained for good projects and qualified borrowers that have a low risk of default. The lenders want to make sure the borrowers are able to repay the loans and have sufficient resources to back the loan with collateral. Obviously there will always be some amount of risk for every loan. World Net Capital I will carefully review your loan request and the information you submit to determine our lender’s risk of losing their money if they lend it to you. The bottom line is that the lenders do not want to lose their money.
Many banks and other financial institutions experienced huge losses during the recent recession. As a result, borrowers now have to meet a higher qualification standard than before the recession. Your credit rating and history have to be as good as or better than before, and the amount you can borrow as a percentage of the property value (LTV) has decreased. In other words, you need to have a good credit score and more down payment. However a positive thing that happened is interest rates are lower now than they have been in a long time and lenders are anxious to make loans to those who qualify. So mortgage payments will be lower for businesses that do qualify for a commercial loan.
Who is lending money in today’s market? Financial institutions that are providing loans today include, generally in order from lowest to highest interest rates: life insurance companies, conduits, banks, savings banks and savings and loan associations, credit unions, mortgage REIT's, and hard money lenders. The interest rates, loan terms, qualification requirements, eligible property types, and loan amounts vary considerable from one type of lender to another. Lenders that offer the lowest interest rates also have the toughest qualification standards. Getting a loan from an insurance company is usually the most difficult and they have strict requirements, but they can offer the lowest rates to those that can quality.
Commercial banks provide relatively good interest rates and make the largest number of new commercial business/real estate loans today. Banks have been making at least 75% of new commercial loans. Commercial banks generally offer a wide range of loan amounts, loan rates, and loan terms. The borrower has to be credit worthy and have the resources to repay the loan, including collateral and a good cash flow. World Net Capital I primarily gets funds from commercial banks. Savings banks and savings and loan associations (thrifts) are making very few commercial business loans today.
Credit unions are making loans for commercial real estate and may provide lower rates than commercial banks. They will finance business properties, like self storage facilities and motels. However, credit unions usually only make loans to local business owners and their loan amount is generally small (typically $1 million or less).
Commercial mortgage REIT's are not very active in the commercial business arena, and they have relatively high interest rates.
Hard money lenders are very active in commercial lending, but usually have the highest interest rates today. Hard money lenders can be used to obtain short-term bridge loans at high rates and high points. Hard money commercial lenders will make loans to borrowers with poor credit and otherwise lower qualifications, up to around 65% LTV; however the cost of the loan may be high. LTV = loan to value ratio, calculated by dividing the loan principal by the appraised property value. Hard money interest rates are generally above 8%.
Conventional commercial interest rates from banks for the top borrowers are typically 1.0% to 1.5% higher than the prime, 30-year residential mortgage rate. Commercial interest rates on guaranteed SBA loans and B&I loans are typically 2% to 2.5% higher than the prime residential mortgage rate. Insurance company and conduit loan interest rates are usually 0.5% to 0.75% lower than conventional commercial loan rates.
Commercial loans usually have a fixed interest rate for the loan term, which is typically ten years or less. Apartment buildings are a notable exception to this; loans for apartments often have terms up to 30 years. The loan term should not be confused with the loan amortization. The loan term is the length of time allowed before the loan balance is due. A balloon payment equal to the remaining loan principal is due at the end of the term. Business owners can refinance the loan at that time for market rates, or sell the property. They may also pay off the loan balance, or balloon payment, if they have sufficient cash. Some banks will make mini-perms for two to three years tied to LIBOR or prime. Amortization is the length of time used to calculate the mortgage payments.
Amortization is the reduction of the loan principal over the period of time loan payments are made. The payments are calculated for the amortization period at the interest rate of the loan. Commercial amortization schedules are front-loaded with interest just as any other loan; you will pay more interest up-front and more principal toward the end of the amortization period. Typical amortization periods are 20 to 30 years, but can be almost any period of time. SBA loans and USDA loans are typically fully-amortized over 25 years. Some conventional multifamily lenders will make 25 or 30-year fully-amortized commercial loans. The rate on such long-term apartment loans are typically recalculated every five years or so. Most commercial mortgage loans are amortized over 25 years, but the lender may require a 20-year amortization for old properties (30 years or older). Most of the fixed-rate loans and leasing arrangements have a prepayment penalty associated with the loan, but are generally considerably less than those required by insurance companies and conduits.
If you need a loan to purchase equipment, you may want to consider equipment leasing. Commercial lenders generally lend 65% to 90% of the equipment value or cost, whereas a leasing program can provide financing up to 100% of the equipment value. World Net Capital I does offer loans for equipment leasing with no upfront fees.
|Last Updated on Wednesday, 11 September 2013 16:38|
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