How Commercial Loans Work
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 it’s your first time to apply for a commercial loan, the process is not the same as applying for a home mortgage 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.
With this arrangement, borrowers, who will have difficulty meeting up with this form of requirement, will either take the option of re-qualifying for their loan or ask for re-financing the loan at the end of the balloon term. The borrower has also to consider the risk factors before entering into this form of requirement, such as: 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. it is also good to consider the commercial loan offers of non-bank lenders who can be less stringent with their requirements, such that some non-bank lenders can provide long-term commercial loans without a balloon repayment but at a higher interest rate than those of the banks.
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After knowing the aspects of repayment of the loan, the next important step of a borrower is to determine how much can he/she apply for a loan with respect to the bank’s terms and that of his/her financial needs. Once the borrower is able to get a full grasp of the terms, he/she has to consider the following: how much cash will the bank likely to grant and how much money should the borrower make available to repay the structured loan. Other bank loan requirements must be incorporated into a borrower’s evaluation process, and these requirements are: 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; bank loans prohibit second mortgages.Why No One Talks About Lenders Anymore