COMMERCIAL LOAN PROBLEMS

It is not unusual to find that business lenders and business loan brokers are not as forward-looking about commercial financing difficulties as most borrowers would expect, and I have published another article about commercial lenders to bypass. The focus here is on some of the typical commercial loan difficulties often overlooked by commercial lenders and borrowers.




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.



A few of these business financing problems will be unavoidable, but in most cases these commercial loan challenges can be met successfully. Business borrowers and their advisors will be better prepared to take appropriate and timely corrective action by properly anticipating these recurring commercial financing difficulties.



(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.



For a purchase, some commercial lenders will want documentation about where the down payment is coming from (sourcing). Many commercial lenders will also require business borrowers to document commercial loan down payment funds over several months (seasoning). Seasoning of ownership involves the minimum time someone has owned a commercial property before they can refinance.



(2) Avoidable Commercial Mortgage Scenario Number 2: A borrower wants to use subordinated debt (a seller second or other secondary financing) in order to acquire a commercial property with a smaller down payment.



Many forms of business financing will not permit a seller second or other forms of subordinated debt. With a commercial loan via non-traditional business lenders, a commercial borrower can use subordinate financing (including seller seconds) to reduce the amount of their down payment.



(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.



Business Financing Recall Contingency Plans: With a commercial loan recall, borrowers will need to refinance with a lender quickly. Prudent borrowers will exclude lenders that require recall agreements when evaluating business loan refinancing options.



To avoid this undesirable recall possibility, commercial borrowers would be wise to include only business financing without recall terms. For borrowers with recall terms in their current commercial loan, it will be equally wise to consider commercial mortgage refinancing prior to an unanticipated recall.



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