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Home Commercial Loan Basics Understanding Commercial Loans
Understanding Commercial Loans PDF Print E-mail


Understanding commercial loansCommercial loans are used to fund businesses and to purchase or finance the construction of a property for a commercial business. They cannot be used for personal reasons. A commercial loan uses commercial property, or real estate, as collateral to secure the loan, often referred to as a mortgage. The commercial loan collateral is sometimes supplemented by a general obligation of the borrower or with a personal guarantee from the business owner. Commercial loans are also called business loans, or commercial mortgages. They can be used to purchase the business premises, start up a new company, purchase inventory or new equipment, fund new construction, perform renovations and repairs, buy a commercial building for new or existing business, expand or extend an existing business, refinance an existing mortgage, cover emergency expenses, provide investment capital, etc.


You can apply for a commercial loan if you have a new business or an established business that needs money, and if you have a legal business entity such as a sole proprietorship, partnership, LLC, corporation, or nonprofit organization. The business or the business project needs to qualify for the commercial loan and verify that it can pay pack the loan with interest in the agreed upon time period. Commercial loans are usually obtained from conventional financial institutions, such as banks, credit unions, and insurance companies; commercial banks provide the majority of business loans.


The commercial loan is almost always underwritten by the value of the property being mortgaged. However, the borrower/owner may use personal assets to supplement the business security if necessary. Lenders may require the owner to establish a separate business entity specifically to own the property so they can foreclose on the property in the event of a loan default.


Business owners have a variety of lending products to choose from. There are generally three broad commercial loan categories: conventional, subprime (high risk borrowers), and guaranteed (i.e. SBA and B&I). World Net Capital I will provide conventional commercial loans and guaranteed commercial loans, but not subprime loans. Our loan products include construction loans, acquisition loans, and refinancing loans, to name a few. We offer loans to owner occupied properties as well as to investor owned properties.


We look at numerous factors to determine if you are qualified for a commercial loan, such as your business plan, long term-business projections, personal and business credit history, available collateral, the property value, down payment, and the amount of money you need. You have to follow a defined procedure and fill out various forms and applications before you can be approved for the loan. These factors are discussed in more detail under Apply for a Commercial Loan.


Three primary criteria used to evaluate all commercial loans are loan-to-value ratio (LTV), debt service coverage ratio (DSCR), and the borrower's credit rating. You will see these terms mentioned often on our website.


The interest rate that you can get on your commercial loan is important because it can make a big difference in the amount of money that you have to repay and how much you have to pay each month in loan payments. The interest rate that you can get depends on many factors as well, including your business credentials and the kind of commercial loan you want. Some loans like construction loans are shorter in term, have less business collateral available, and usually have a higher interest rate. Longer term loans on an established business with an excellent financial history can get lower interest rates. In today's post-recession world, commercial loan interest rates are lower than they have been in a long time, but there are more restrictions and qualifications that business owners have to meet to be approved for a loan.


The loan term is another important factor you will need to consider. Commercial mortgages have a loan term and an amortization period. The term is the length of time that payments are made until the balloon payment is due. The balloon payment is the remaining loan balance (or remaining principal) at the end of the term. Most loan terms are 3 to 10 years, but they can be longer; apartment buildings typically have terms that are 20 to 30 years. Amortization is the length of time used to calculate the loan payments. By definition, amortization is the reduction of the loan principal over the period of time loan payments are made. This makes the loan payments smaller than if the loan term was used as the calculation basis. The amortization period can vary considerably, but is usually 20 to 30 years. At the end of the term, the borrower must pay the remaining principal, refinance the loan, or sell the business.


One final point to make about commercial loans. Most commercial loans have substantial penalties for prepayment of the loan before the end of the term. These generally vary from 1% to 5% (or higher), depending on the type of loan and how early it is prepaid.

Last Updated on Wednesday, 11 September 2013 16:37

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