Most business borrowers will be unpleasantly surprised by the problems generally experienced with typical business financing. Perhaps of even more concern is that many serious commercial loan difficulties are not widely known even by loan advisors. The potential difficulties can occur with business opportunity financing, real estate investment property loans and business cash advance services, although some of the issues will be restricted to specific circumstances.
Commercial Loan Advisory Reports -
We have published separate commercial loan advisory reports which provide a comprehensive discussion of the major problems likely to be encountered in typical business financing and commercial real estate loan circumstances. For example, one report focuses on common business opportunity investment financing difficulties. In another report, we discussed the obstacles usually experienced with SBA loan refinancing.
The Black Ice Analogy: Unseen Business Financing Problems -
The focus in this article is to highlight several of the more obscure commercial loan problems. A commercial borrower should consider such obscure business financing problems to be extremely important. When ice is virtually invisible on a road surface, this is usually referred to as black ice. Drivers who have experienced this hazardous condition are likely to realize that invisible business finance problems are equally dangerous for the financial health of a business.
Online Business Finance Applications -
The first relatively unknown business financing problem involves the increasing use of internet technology by commercial lenders. Commercial borrowers will be asked to submit online applications by numerous commercial loan websites. This is not a prudent way for a business owner to proceed with their commercial financing.
It is important that business owners understand that it is not in their best interest to submit an online business financing application. For a more detailed understanding of why an online commercial loan application is inadvisable and how to proceed in a search for viable financing, borrowers should review the report entitled How and Why to Avoid the Online Business Loan Application Trap.
Recall Provisions for a Commercial Mortgage -
The next obscure but nevertheless serious business financing problem to anticipate involves the use of loan recall terms by a lender. Commercial loan recall covenants mean that the lender can force the borrower to repay early by calling the loan before it would normally expire. Many traditional commercial lenders routinely place recall clauses in their commercial mortgage conditions, but this potential concern is not applicable to all borrowers since some financing agreements will not allow a loan recall possibility.
The circumstances which can cause a recall will vary but can commonly include periodic lender review of financial statements, tax returns and credit history. If prescribed levels of income, credit scores or other benchmarks are not present, then the lender will typically notify the commercial borrower that they must pay off the loan within a 30-90 day period.
With a commercial loan recall, borrowers will need to refinance quickly. Prudent borrowers will exclude lenders that require recall agreements when evaluating business financing options. For commercial borrowers who have recall provisions in their current business loan agreement, it will be equally wise to consider refinancing their commercial mortgage before a recall occurs so that refinancing is accomplished according to the preferred timetable of the business owner.
Balloon Payments and Short-term Business Loans -
Another often overlooked commercial financing problem is the increasing emphasis on short-term financing by many commercial lenders. How long is a long-term commercial loan? Depending on individual business financing circumstances, the preferred loan period is likely to be between 10 and 30 years. Unfortunately many business lenders often consider three years as the maximum period before a balloon payment will be due for a commercial mortgage.
With a balloon payment condition, a business owner will be required to either pay the remaining loan balance or refinance. This kind of loan is a short-term commercial loan instead of long-term and should be avoided whenever feasible. Longer-term business financing will often be the critical difference that facilitates a successful business investment because new financing will not be required for many years and business loan payments will usually be reduced.
Inexperienced Commercial Real Estate Loan Lenders and Advisors -
The final example of a problem that is not obvious to most commercial borrowers involves a shortage of business loan experts providing candid advice to business owners. Business financing and business investing has become increasingly specialized in recent years. There have been some recent real estate and business investment developments that have made this process even more complicated. The current turmoil in residential real estate investment property has resulted in an increasing number of residential lenders and advisors attempting to become active in commercial loan activities.
This is an almost impossible transition for most residential lenders and advisors. There are over 25 critical differences between residential and commercial property investing. As a result, these new and inexperienced commercial financing advisors frequently provide woefully inadequate advice and potentially disastrous business financing for their clients.
How to Avoid These and Other Commercial Financing Problems -
What can commercial borrowers do to avoid a similar fate? A pragmatic approach is to explore additional resources that will facilitate a better understanding of complex business finance issues. The Commercial Real Estate Investment Property Loan and Business Finance Guide is one example of business financing resources that will provide strategies and solutions for many problematic commercial loan circumstances.
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