Many borrowers are unprepared for common business loan and commercial mortgage issues that arise. By preparing for the worst case scenario and anticipating common obstacles that might occur during such a process, business owners and/or loan seekers are better prepared for the potential consequences should their financing options go awry. Moreover, being prepared for the unexpected also leaves the borrower less vulnerable to downturns in the economy, inflation, acts of God, and other variables beyond the borrower’s control. If business owners are looking to invest in residential properties, the opportunities for business loan and commercial mortgage options are abysmal at the present time. This article will address some crucial commercial loan factors and help prepare borrowers for potential pitfalls in the process.
Some borrowers might be surprised to learn that business investment lenders and loan brokers are not as prepared for the wide array of potential financing setbacks that may arise. Unforeseen circumstances can result in unanticipated issues with commercial loans, and borrowers should be prepared to deal with these problems head-on.
With business financing, there are several common commercial mortgage missteps that should be avoided. It is also important to note that business loan difficulties are far more prevalent and worrisome than many borrowers realize. While some of these issues might be unavoidable, they often can be successfully resolved if borrowers are aware of the problems and prepared to take prompt action to remedy them.
One avoidable business misstep in relation to commercial real estate investment properties involves the use of secondary business financing options. Many borrowers may seek out subordinated debt, which is also commonly known as secondary financing, in order to acquire investment property at a lower down payment. While many types of traditional business investment lenders will not permit secondary financing, commercial loan borrowers can, in fact, employ this financing option to reduce their down payment. This is a major difference between commercial loan versus traditional business lenders.
Another issue that can arise with commercial mortgage property loans is sourcing and/or seasoning of assets, as well as seasoning of ownership. Sourcing occurs when commercial lenders require documentation of the source of the down payment for a purchase. Moreover, these lenders can also require that the funds for the down payment be verified. This is referred to as seasoning and may take one to 12 months, depending on the variables involved. Furthermore, seasoning of ownership refers to the minimum time period a commercial property must be owned before refinancing can occur. While these issues may not deter all borrowers, those loan seekers who have other options should look for lenders without seasoning and/or sourcing requirements.
A third problem borrowers should be aware of involves commercial mortgage recall terms. These conditions allow a lender to force a borrower to repay their loan before its maturation or end date. If recall terms are not included in a loan agreement, then a borrower should not worry about this possibility. However, it should be noted that commercial lenders will often include such terms in business loan agreements. While the provisions for such a mortgage recall vary, they are often associated with the lender’s monitoring of the borrower’s financial statements, credit history, tax returns, etc.
If these terms are not specified in the loan agreement, the lender can require the borrower to repay the loan on short notice. Therefore, it is the borrower’s responsibility and in their best interest to know if recall conditions apply to the business loan. If so, they need to know exactly what those terms are and make sure they are clearly outlined in the agreement. Furthermore, it is also recommended that the borrower retains competent legal counsel and/or a financial advisor to review all documentation associated with the transactions involved.
The best way to avoid these loan recall terms is to only deal with lenders who do not utilize them. It is also in the lender’s best interest to attempt refinancing with a borrower before implementing a mortgage recall. If the parties can agree on refinancing terms, it is beneficial for all parties involved. However, depending on the financial circumstances and other related factors, this solution may not always be possible.
While many borrowers might be unprepared for common business loan and commercial mortgage issues that arise, those who are prepared for the worst case scenario and anticipate common obstacles that might occur during such a process will likely succeed. Hopefully, this article has provided borrowers with information on some of the critical commercial loan factors and it can help prepare borrowers for potential pitfalls in the process. It all comes down to borrowers beware, knowing the facts, reading the fine print, and being prepared for all potential outcomes.
Written and Edited by Leigh Haugh
BB&T Corporation–Avoiding Common Small Business Start-Up Problems
Street Directory–Business Loan and Commercial Mortgage Difficulties
American Bar Association–Negotiating the Loan Commitment
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