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Commercial lenders and commercial loan brokers are not as proactive about business financing problems as they could be. Because of this tendency, I have published a separate commercial loan article about business financing lenders to avoid. The focus of this article is on the equally important business loan problems often ignored by commercial borrowers and lenders alike. 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. Some commercial lenders will require borrowers to document the source of the down payment for a purchase (sourcing). Commercial lenders will also frequently require that business financing down payment funds be substantiated, most commonly for 1-12 months (seasoning). Seasoning of ownership is based on the minimum time a commercial property must be owned before refinancing can occur. (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. Many commercial loan programs will not permit a seller second. With business financing through less restrictive commercial lenders, a borrower will be able to employ a seller second and reduce their down payment needs. (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. If you think that describes short-term commercial loan terms rather than long-term, you will be pleased to discover the lenders that will provide 30-year business financing. A long-term business loan will frequently be the factor that creates a successful commercial investment scenario because a new commercial mortgage will not be needed for many years and monthly payments will be substantially decreased. (4) Difficult Business Financing Situation Number 4: Commercial loan recall possibilities. Commercial mortgage recall terms frequently permit the lender to call the loan (forcing the commercial borrower to repay early) prior to the expiration of the loan. This issue is not of concern to commercial borrowers whose business loan does not contain provisions permitting the lender to recall the loan. Many traditional commercial lenders routinely place recall clauses in their commercial loan conditions. The terms which can cause a recall will vary but will commonly include periodic lender review of financials and credit history. Under these circumstances if prescribed levels of income and credit standards do not occur, then the lender will typically notify the commercial borrower that they must pay off the loan within a 30-90 day period. 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. Copyright 2005-2007 AEX Commercial Financing Group, LLC. All Rights Reserved.
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S.A. Bush provides candid business financing advice. Sign up for a free AEX series of Commercial Loan and Working Capital reports Visit our commercial loan article directory for a completely unique version of this article.
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