Banks & Private Loan Alternatives for Commercial Mortgage Loans: Part 2

This is the second of a three-part series about commercial mortgage loans. If you are considering applying for a commercial mortgage loan, read part 1 and refer to the following list of questions before you speak with a commercial lender.

3.  How long will it take to secure a commercial mortgage loan?

Understandably, it frequently takes weeks before the borrower can as much as a verbal loan commitment from a bank.  Even after the loan commitment has been made, the bank's credit committee may veto the loan. In such a situation, the business borrower must then start the whole process over with a new lender.  If you have a very good credit rating, a great relationship with your bank, a solid, verifiable history of earnings and profits, and you are not in a hurry, a local bank will probably give you the lowest interest rate on your commercial loan.

If you do need to pre-qualify quickly, you can try shopping for credit over the internet or looking at alternative, non-bank sources of funding.  Once you've secured a commitment from a direct lender, you can start a parallel process with your bank.  Some direct, non-bank lenders can give you a verbal commitment within a few days. Bear in mind, that you are searching for "commercial" loans -- most offers from Internet companies will be for residential loans, meaning that you will need to screen your results.

At this stage, it's imperative that you've done your own financial analysis as indicated in part 1 of this series. Can you repay a balloon loan? What are the covenants and/or conditions of the loan and can you accept them?

If you know that your profit and loss statements are questionable or your credit score is fair to low, applying at banks will be a waste of time.  Instead, go directly to alternative, non-bank lenders.

4.  What are the covenants and conditions that are required?

Prospective commercial borrowers may not know that there may be more required of them than simply making their monthly payments on time.  Some commercial loans require that you provide income statements on an annual or quarterly basis along with balance sheets and tax returns.  Some loans will require covenants - promises that your business will meet certain criteria in the future - such as a positive cash flow, or a certain debt-to-cash-flow ratio, or other financial criteria.

If your business falls short of the terms and conditions contained in the loan covenants, your bank may deem that your loan has entered into default.  Default in turn triggers numerous penalties, for example it may require that you pay back the loan immediately. This could put you in the position of finding another lender very quickly or facing foreclosure on your property.

Ask the lender up front what conditions or covenants apply because different lenders apply different loan conditions. Some non-bank loans charge a slightly higher interest rate but will waive all covenants and conditions except for timely repayment of the loan. If you feel that your business's cash flow is uncertain then consider these alternative loans first.

5.  What kind of documentation is required?

Traditional lenders require 3-5 years of financial statements, income tax returns, and other documentation. 'Other documentation' may include:

  • Leases
  • Asset statements
  • Original corporate documents
  • Personal financial records of the business owners

Many small businesses do not have the level of income documentation some lenders require.  Asking about documentation ahead of time will save you the headaches of delays and rejected loan applications.  Note: Documentation required and the approval timelines are related - the more information required, the slower the loan approval and funding process.

6.  What if I want to sell the property?

If your business flourishes, you may find yourself wanting to repay the loan early or to move to a larger space.  Unlike residential mortgage loans, commercial mortgages usually have pre-payment penalties. However, some commerical lenders will allow the buyer of your property to take over the mortgage and continue making the seller's loan payments. This is called an assumable loan and it's an excellent selling point, providing built-in financing for the buyer.

Please continue to part 3.