Understanding that commercial loans are not only larger than personal loans but that the terms and costs are different is critical to making a smart choice for your business. Commercial loans are not as simple as consumer loans and you are not evaluated in the same method either. A business is much more dependent on economic conditions than a consumer is when it comes to financial stability. When times are tough economically, most people can keep within their household budget with a few minor changes but a business can be crippled by an economic turn of events. This makes business’s a higher risk when it comes to borrowing money.
As a result of the higher risk of commercial loans, lenders charge a higher interest rate to businesses. And that rate can be much higher for a new business or one that does not have a proven financial history. The lender will also look at the financial health of the company and its creditworthiness to determine the interest rate that it is willing to offer. Another factor is the loan to value ratio. This is basically a way of looking at how much you are asking to borrow as it compares to the value of the property that you are buying. This is because the property is the collateral for the loan and the lender wants to be sure that the property holds enough value to cover the balance of the loan if you default. Commercial property values tend to fluctuate more than residential properties so there is a better chance of the value dropping and the lender foreclosing on a property that does not have a market value large enough to pay off your loan. So unless you are making a substantial down payment then your loan rate will be a few points higher. This is just a little more security for the lender that they will get paid in full, one way or another.
In addition to the interest you are going to be paying some fees to your lender and in most cases they are paid up front. You will need to pay for a property appraisal, survey fees and any legal fees that are associated with the drawing up the contract. Sometimes these fees are call loan origination fees or loan application fees but they are basically to cover the administrative costs of the lender. You should also understand that these are nonrefundable fees and that they are simply gone if you are not approved for the loan. For this reason, you want to have your financial documentation in order before you begin the application process.
Before you begin the application process, it is not unreasonable for you to as the lender for a detailed accounting of their fee structure. This should tell you about any fees or costs that you are required to pay upfront and also any fees that will be reoccurring annually. You will likely not get quoted an interest rate at that time as the lender needs to review your financials before determining the rate but it will give you a good idea of the fees and then you can plug in a general estimate for interest to know the total cost of the money that you are potentially borrowing.
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.