This calculator will compute the payment amount for a commercial property, giving payment amounts for P & I, Interest-Only and Balloon repayment methods -- along with a monthly amortization schedule.
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Understanding Commercial Mortgage
If you are looking to start up your own business, there are several factors that must come into play before you can move forward toward a successful future. One thing to consider is how to finance your business and get product and services moving. There are several ways to finance your business including savings, investments and utilizing equity from your home or other assets. Chances are you will have to acquire a commercial mortgage in order to give you the borrowing power to fund your inventory and pay for receivables. The first step in getting your business off the ground is getting approval through a lender. You will have to make sure that you have a good credit score and a solid history of credit worthiness.
How Much Should You Borrow?
Some of the main goals of obtaining a commercial loan is for maximizing business profitability, increasing your working capital and strengthening your competitive position in your industry. Knowing exactly how much you should borrow should be something you should figure out before seeking financing. According to the U.S. Small Business Association, the average loan amount in 2012 was around $337,730. Some loans have a maximum lending amount of $5 million dollars. The amount you wish to borrow depends on several factors such as:
- Your annual net income for the past 24 months
- Your credit history
- Other outstanding debts
- Down payment or investment
Depending on the interest rate you qualify for based on your credit score and past credit history, the loan officer will calculate how much of a loan you will qualify for. Things to consider include the loan amount, qualified interest rate, term of the loan and any additional costs to the monthly payment. These calculations will tell you how much your monthly payment will be and how much interest you will be paying on the loan over its lifespan.
If you are trying to finance an existing business, there are several advantages. The first step is preparing a business plan is taking a look at your past financial history. This includes financial statements and graphs from existing and prior years. Write up a statement that displays the assets that you are using to secure or back up the loan. Showing the financial institution that your business has been profitable in the past will increase the chances of loan approval. Past profits may significantly increase the amount they will lend you as well.
How much loan you will need depends on several factors. Are you acquiring a new building or making improvements to an existing one? Do you need new inventory? Are you using the loan to pay off existing debt? As long as you can justify a future profit margin and benefit to taking on more debt, you shouldn’t have a problem with approval as long as other requirements are in place. Some banks may only lend to you on a short-term basis at a higher interest rate to see if there has been a significant profit margin and then offer better loan terms after the trial period.
How Long Does it Typically Take to Get a Commercial Loan?
There are many different financial institutions that will lend to you if you qualify. The question is where should you make the first inquiry? If you have a financial institution that you have banked within the past, they should be your initial contact. Even if they don’t advertise good commercial interest rates, they may be able to give you special financing just because you are a current customer or have banked with them in the past. Every circumstance is different and it is important to inquire before you decide to apply.
Generally, once you start the application process, you can expect to receive a preliminary answer or preapproval that same day or the next business day. This does not guarantee loan approval or the line of credit they will be offering you. Several things including running financial history reports, more in-depth credit checks and reference checks could take up to 10 to 20 business days. Once everything is in place, the loan then goes to underwriters who will carefully decide on a face to face basis if they feel they should lend to you. In some cases, they may want to meet you or other investors who will be contributing toward your business goals financially. Once it is approved through underwriting, the next step is setting up the loan terms and signing the final loan documents.
Benefits of Banks vs. Non-Lenders
A bank or federally funded financial institution will be able to successfully back up the money you need to get your business started. This is one benefit to going through a bank for a commercial loan as opposed to a non-lender or private lender. In many cases, a non-lender will only give you so much money at a time to work with. If you are approved for a certain amount through a banking institution, funds should be immediately available. Banks also go through rigorous credit standards to assure that payments are made on time and reported to all three credit bureaus including TransUnion, Equifax and Experian.
Having a bank that reports all of your on-time payments and credit limits will sustain or improve your overall credit score and credit ranking. This will help with future loan qualifying requirements. A traditional bank is also a safer way to access as well as manage your loan funding. Utilizing your checking account, ATM card and personal withdraw when you need it, makes it a safer way to access, track and manage your money. You can also write checks and pay for bills out of your commercial loan account. Writing checks and automatic withdraws are not feasible if you are going to a non-lender or non-government-backed financial institution.
Another benefit of going through a bank as opposed to a non-lender is that the terms of your loan can be re-wrote or reformatted at any time. This means that if your financial situation changes that payments can be lowered in interest rates adjusted if need be. The drawback of going through a nontraditional lender is that the fees and provisions that were set in place before borrowing money often stand whether the loan is paid off early or not.
Another advantage to going through a bank is that they are often backed by government-sponsored loan guarantees. This means should something happen with the bank or the business gets bought out at anytime during the life of your loan, the government will guarantee payment to you that funding is available. There are also 7(a) and 504 loans available through the small business administration. These loans assist with financing for real estate, inventory, equipment, business acquisition startup costs and partner buyout's. These loans range anywhere from $250,000 to over 10 million dollars.
Commercial loans funded by banks can be used to make special purchases and financing can be reorganized as further needs may occur. For instance if your business grows into a franchise, a bank can easily recognize these needs and give you the additional working capital that you need. Maybe you need to buyout partner in additional funding to do so. A bank will be able to refinance your entire loan so that you can pay off your partner and move on independently.
One thing a bank can do as opposed to a non-lender is consolidate multiple existing loans that may currently finance your equipment, machinery, inventory and vehicles. Either consolidation is an option or working to lower interest rates by offering a future balloon payment may be a viable alternative to paying multiple loans at once.
Drawbacks of Banks vs. Non-Bank Lenders
If you have been considering seeking financing through a non-traditional method such as a silent investor, there may be some risks involved. The investor may have certain stipulations or high expectations in making sure that he gets his money back and then some. This could mean if you don’t make a profit, he will pull all funding or he may request that some form of your personal property be put up as collateral. Examples of collateral may include:
- Paid vehicles
- Vacation home
- Recreational vehicles
- Stocks and bonds
- Other items of value
The agreement may be only verbal or not notarized. This can pose a serious issue that could lead to both of you facing each other in small claims court. The outcome could be disastrous especially if the non-lending partner is on the deed to your business.
You could lose a lot of time and money invested she the case go to court. By choosing a financial institution, you have certain rights given the terms of the loan that will help protect you should you be late on a payment or your financial situation changes. Some defaulted commercial loans can be discharged appropriately under federal bankruptcy laws, whereas seeking financing through a non-lender can cause complications with a bankruptcy discharge or other forms of repayment programs.
How do Commercial Mortgages Differ from Traditional Mortgages?
Commercial mortgages differ from traditional mortgages in that there are more items listed under the terms of the loan. This means that all of the buildings, furniture, inventory, as well as start up costs are included as part of the loan proposal. A traditional mortgage typically just lists the property, structures, dwelling and sometimes other larger property features. For a traditional mortgage loan, provisions are straightforward and payments are based off the current interest rate or if it’s an adjustable rate mortgage, the payments may fluctuate.
Property appraisals generally follow the basic criteria of loan approval for both types of loans--residential and commercial. A home appraisal is unique because each real estate transaction is different due to the condition of the home and property at face value. Once an appraiser conducts a traditional real estate appraisal, he looks at the market value of the home or property. The market value is based off of what other homes in the same price range are selling for. The real estate appraiser may look at a previous appraisal, if available and compare it with any improvements that have been made since then. The appraisal is then used as part of the final decision process for loan approval.
The commercial mortgage appraisal will take into to consideration a lot more than just the property value. It will also include things such as both the insurable value and liquidation value of property. Often times the lending institution or mortgage broker will order a commercial appraisal as opposed to the borrower. Part of the appraisal process must include a conditional commitment letter or term sheet signed by the bank. This is a good faith letter showing that the borrower has met the pre-approval criteria for loan approval. With both a commercial loan and a home mortgage loan, the appraisal is an important part of the approval process. The difference between the two is that a commercial loan appraisal can take up to 30 days longer than a traditional mortgage appraisal.
Another difference between a traditional mortgage and a commercial mortgage is that there may be more than one party on the loan. For a home mortgage, it is often an individual or a married couple that apply for the loan. There can be investors or other parties that use both of their credit to apply for a loan but generally it is only an individual or two people. For a commercial loan, several investors may have applied and will need to meet criteria prior to closing. This can be tricky unless every individual has spotless credit and no underlying causes for loan rejection.
Balloon Payments and Risks
Maybe part of your commercial loan package includes a balloon payment. A balloon payment occurs when the lender decides that they want a lump sum of money at some course over the life of the loan. These stipulations are always set in place prior to the final terms of the loan being presented to the borrower before signing. With a balloon payment, it means that you will have to pay a lump sum of money at specified times during the life of the loan or at the end of the loan. The term "balloon" was given its name because of the blown-up or large amount of money that pops up within a loan agreement. These terms vary per lender and are often seen when you do a land contract or seek a private, alternative commercial loan.
How it works is that the loan is amortized or spread out over a long period of time. With a balloon payment, the payments are generally interest-only or low-interest for the first three, five or ten years. At the end of a specific time frame or date, a balloon payment is required to pay off the entire amount of the loan. This means you will have three options:
- Pay off the entire loan balance in cash.
- Refinance the loan and cash out the balance.
- Sell the property and pay off the balloon payment.
You will have to find out if there are certain stipulations on the loan. In some loan terms you can pay off the balance of the loan minus the balloon payment if the balloon isn't due within the next few payments.
While a balloon payment can help you get your business started with initial lower loan terms, the payment can also come back to bite you, down the road. Sometimes a balloon payment is also referred to as a bullet payment. This happens when a large sum of the debt suddenly becomes due, placing a burden on the business and the borrower. This can be financially crippling and in some cases doesn't make sense if the funds are not readily available to pay off the terms of the loan. If your business is not stable or has been experiencing financial setbacks, a balloon payment may lead to a downward crumble of not being able to pay back the loan as well as other business and personal expenses.
Failure to pay off a balloon payment can lead to the loan accelerating and becoming due and payable immediately. In some cases, the bank will try to collect on the loan and expect all outstanding payments to be due, otherwise foreclosure could take place.
If you suddenly find yourself unable to meet the terms of a loan agreement, in particular an upcoming balloon payment, the first thing you should do is contact your lender. Your lender may be able to discuss repayment or loan restructure options with you. You may also be eligible for refinancing so that you can eliminate the balloon payment and get into a loan agreement that is affordable for the long term.
While a balloon payment option loan may seem appealing now, consider if your company has enough potential growth or optional funding to meet those bulk payments once they arrive.
It is important to note that there may be some hidden costs with a commercial loan. It is important to have your attorney look over any real estate or loan documentations before you agree to sign them. Hidden costs may not appear right away or be listed in a checklist section on the loan documentation. They can arise under certain terms such as these:
- Legal Fees- Legal fees may be in the form of what your attorney or the seller’s attorney may apply for various services related to the inspection and closing of the loan and real estate transaction. In most cases, your attorney will explain what these fees are prior to accepting his services. If issues arise before the loan closes, there may be additional fees that could include attorney fees, research fees, title search and any court filings if applicable.
- Appraisal Charges- The appraisal is an important part of the entire commercial loan process. A commercial real estate appraisal can cost several thousands of dollars because there is so much input that is needed for a proper analysis. Depending on how large the property is and how what type of property is being acquired at closing, the appraisal can quickly accumulate several hundred dollars of hidden or unforeseen costs.
- Application Fees- The application fees for a commercial loan are often pre-set so there shouldn’t be any surprises at closing. If there are any changes to the loan or an additional party has been added to the loan documentation, fees could be added before the account can be approved and closed on.
- Survey Charges- Most generally a survey of the property will have to be done. This is done separately from the appraisal. A survey includes field staking of utilities, building offsets, parking lots, curbs, gutters and driveways. A topographic survey and boundary survey will have to be presented to the lender and filed appropriately. Depending on if the loan is for new construction or existing construction, fees can arise as inspections continue to take place.
- Adjustable Rate Loans- If your commercial loan package is part of an adjustable rate, there could be some hidden fees involved. Adjustable rate means that your interest rate will fluctuate as the interest rate changes. This means that the payments on your loans over time could increase or decrease. There may also be certain fees involved when this change takes place—be sure to ask your lender about these hidden fees if your loan has an adjustable rate.
Examine all of these terms before signing to assure that the fees are fair in comparison to what other lenders are charging. In some cases, you may be able to get the bank to waive these fees.
Documentation Needed to Acquire a Commercial Loan
Part of inching closer to closing on your commercial loan, means you will have to provide proofs and documentation before the loan can be finalized. While these are the general criteria requirements for the loan, your loan officer may ask for more or less documentation depending on their loan practices.
- Personal Information- You will have to make sure you can provide documentation of all of your personal information. This means a valid driver’s license, social security card and proof of address. Bring original documentation to your loan appointment to assure that the loan can be processed promptly and accurately.
- Financial Records- Your financial history must match all of the information that you provide on your credit application. Provide the last 24 months of W-2 or W-9 forms, any self-employment tax forms and documentation, your current pay stubs and your bank records if you are self-employed. Include the last 24 months of filed tax returns for your entire household. Your loan officer may require more information or less, depending on the application process.
- Appraisal Results- To initially start your application, you may not need the appraisal in hand. If there has been a recent appraisal done by the current owner or you are refinancing the property and have one that is fairly up to date, you may be required to submit this with the application. Otherwise the appraisal is part of the entire loan process and will have to be submitted prior to closing.
- Survey- The property survey is one of the main documents needed to fully process the loan. The survey is also done prior to closing and will have to be signed and presented prior to the loan being completed and closed.
- Real Estate Documentation- The original real estate listing (if a new sale) will have to be presented to the loan officer. If you already own the building and are refinancing then you will not have this information. Blueprints to the building and property dimensions may be required if you are planning on building or making an addition to existing property.
- Business Plan- Often times, the underwriting group may require you to present a business plan. This will help them see your vision and how loan approval will benefit you and bring applicable profit.
Commercial Loan Conditions
As part of the underwriting process, bankers often have a risk assessment already in place to determine if they should grant a loan. Once credit scores have been run and documentation has been verified, they take one last look at the financial plate of the borrower to decide if they truly should take a risk and build a business relationship.
Sometimes loan conditions are based upon the 5 C’s of commercial lending qualifications:
- Capital- Your overall net worth and equity play an important part in how your loan conditions will be wrote up by the lender. This means if you have a substantial amount of liquid cash or collateral to offer the bank as a down payment, your chances of getting approved are greater. This sends a strong message to your lender that you want nothing more than for your business to succeed and are willing to invest in whatever it takes to make it work.
- Conditions- The bank will make sure that they feel you can meet the conditions of the loan, including the payment and any future balloon payment if applicable. They may consider your past, current or potential customer base, liabilities and area competitors.
- Character- Underwriters will take a good, long look at your personal character as well as your business practices. This is based off of a variety of factors including your overall trustworthiness. Personal references will be closely examined, so make sure you have references listed that can be contacted and will give and open and up front response to personal questions and business practices. The bank may also look into your educational background and what you went to school for. They may also dig into past business associates and acquaintances as part of their final approval process.
- Capacity- The overall capacity at which you can repay back the loan is also very important. Banks will look over the cash flow you currently have and how you expect that to increase once the loan is approved.
- Collateral- Collateral is a current asset that you own outright that can provide reassurance to the lender. Some examples of collateral include real estate, vehicles, equipment, account receivables and recreational vehicles. These are good faith items that you can list on your loan application or in a separate clause on the application to increase your chances of getting loan approval within the dollar amount you need to succeed.
Commercial Loan Terms
There may be some loan terms as set forth by the lender in the agreement. One of these may be a pre-payment penalty. This means if you decide to pay off the loan or cash it out prior to the end of the term, you could face pre-payment penalties. Pre-payment penalties vary per lender but generally range anywhere between 2 and 4 percent of the loan. The reason for this is to guarantee the bank makes money, even if you decide to take your business elsewhere. Banks often refer to this as a profit calculation or risk calculation. It is important to check your loan documentation or contract and have it closely examined by your attorney to assure that there are no pre-payment penalties and if there are, if you are willing to risk those penalties and still close the deal. Not all pre-penalty clauses will hurt you, especially if you have a good interest rate and plan on paying off your loan all the way to the end of the loan term.
Commercial lending is something to take seriously. You are borrowing a lot of money to invest in your future, so it is important to maintain a good working relationship with your lender. As long as you keep up with proper business practices, you can expect growth and many years of success as you work on paving a good future. The SBA offers a wealth of information on this topic.