Commercial borrowers will frequently discover that lenders and business financing brokers are not adequately proactive about commercial loan obstacles. To address this, I have published a related business loan article about business lenders to circumvent. The central point of this article is about key commercial financing obstacles which business borrowers and lenders often fail to see in time.
Unexpected circumstances can create chaos with business financing, and commercial borrowers should be prepared in advance for these commercial loan possibilities. There are a number of business financing problems to be avoided with a commercial loan. Difficulties with a typical business loan are probably more common than most commercial borrowers realize.
Some of these difficulties might be unavoidable, but in most cases these business financing challenges can be successfully overcome. By being aware of these common commercial loan obstacles, borrowers and their advisors will be properly positioned to take timely and appropriate corrective action.
(1) Difficult Business Financing Situation Number 1: Sourcing/seasoning assets and seasoning of ownership. This particular commercial loan problem will not be relevant to all business borrowers. However, if it is relevant, commercial borrowers should seek out a lender without sourcing and seasoning requirements or limitations.
For a purchase, some commercial lenders will want documentation about where the down payment is coming from (sourcing). Many commercial lenders will also require business borrowers to document commercial loan down payment funds over several months (seasoning). Seasoning of ownership involves the minimum time someone has owned a commercial property before they can refinance.
(2) Difficult Business Financing Situation Number 2: A borrower wants to use a substantial amount of subordinated debt (a seller second or other secondary financing) to reduce the amount of cash needed to purchase a commercial property.
Commercial mortgage lenders will often not permit subordinated debt. With a business loan from more flexible lenders, a business borrower will not encounter restrictions on the use of subordinate financing and will decrease the down payment required.
(3) Avoidable Commercial Mortgage Scenario Number 3: A business loan scenario that requires long-term business financing. How long is a long-term commercial loan? Business lenders often consider 3 years as the maximum period before a balloon payment will be due for a commercial mortgage.
For those of you who feel that is a short-term business loan, you should restrict your options to commercial lenders that routinely offer a period of 30 years for a commercial loan. Long-term business financing will help facilitate a profitable commercial property investment because monthly commercial mortgage payments will be reduced, monthly cash flow will improve and new commercial financing will not be an issue for many years.
(4) Avoidable Commercial Mortgage Scenario Number 4: Business loan recall provisions. Commercial loan recall covenants mean that the business lender can force the borrower to repay early by calling the loan before it would normally expire. This potential concern is not applicable to all borrowers since some business financing agreements will not allow a loan recall possibility.
Business lenders regularly include recall clauses in their business loan agreements. The provisions which will prompt a recall will vary and typically include annual business lender monitoring of financial statements, tax returns and credit history. Without agreed income, tax returns and credit standards, the lender can choose to require the borrower to pay off the commercial loan within a very short period of time.
Contingency Plans for Business Loan Recalls: When borrowers receive a business financing recall, they must quickly obtain refinancing assistance. When reviewing commercial loan choices for refinancing, borrowers should exclude potential lenders that require recall terms.
Borrowers would be wise to exclude business loans with recall terms so that they will not be confronted with an unanticipated recall situation. If business borrowers have recall conditions in their current commercial mortgage, it will be equally wise to actively pursue commercial loan refinancing before a recall is initiated by the lender so that refinancing involves a timetable convenient to the borrower.
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