Credit-worthy small business owners and investors seeking commercial mortgage financing have a choice: they can work with their local bank or partner with one of the many non-bank alternative lenders in today’s marketplace.
The ideal solution will always depend on the real estate in question, as well as the individual’s financial history and business performance. However, prospective borrowers can narrow their search by determining what they value most: the lowest possible rate or the greatest amount of flexibility.
Looking for the lowest rate and most attractive terms?
It is no secret that banks consistently offer the lowest interest rates on commercial mortgage loans. After all, they often have access to more capital and are able to generate revenue from other services beyond their lending division. The challenge for investors and small business owners lies in qualifying for bank loan programs.
Banks are typically more risk-averse than alternative lenders. As such, they generally offer programs that include tighter restrictions on factors like occupancy, seasoning, and credit scores. This prevents many bourgeoning small business owners from working with banks – however, those who are more established may find it easier to clear the necessary hurdles and secure an attractive loan.
Those seeking loans of $2 million and below may find it even more difficult to do business with large, name-brand banks. Many have determined the revenue generated from smaller loans simply does not justify their underwriters’ time and effort.
Still, the bottom line is that prospective borrowers who are able to secure a bank loan should in most cases do just that. The low interest rate is a clear benefit they will enjoy each month as they work to improve their business or invest in another property.
Need more flexibility than banks are able to offer?
Regardless of their individual loan qualifications, small business owners and real estate investors face challenges based purely on the nature of their business.
For instance, a real estate investor may have a short window of time in which to purchase a new property before the seller opens up the opportunity to other interested parties.
Or consider the restaurant owner who wants to take a significant amount of cash out of their existing mortgage to pay for a new set of kitchen appliances.
In these and other cases, the prospective borrower may be perfectly capable of working with a bank – they just need more flexibility than a bank is typically willing to offer.
Non-bank alternative lenders generally boast expedited transaction speed, fewer documentation requirements, and a greater willingness to look past issues related to stabilization and occupancy. In exchange for these benefits, borrowers can expect to pay a higher interest rate.
Ultimately, investors and business owners considering several different lending options must choose their priorities. If their main goal is to secure commercial loan financing in a matter of weeks, it may make sense to work with a non-bank lender and pay a higher interest rate. If low monthly payments are the primary concern, perhaps they will need to accept a lower cash-out amount or revise their requested loan-to-value (LTV) rate so their request better fits traditional bank programs.
Of course, not every prospective borrower is in a position to choose between bank and alternative lending programs. But those whose loan requests are rejected by banks should note that they still have a number of available options.
If an investor or business owner has been denied bank financing, their first step should be to determine the underlying reason. If the rejection was tied to an aspect of the loan request, such as the loan amount or LTV, the prospective borrower can simply make an adjustment and apply once more.
However, many issues cannot be easily or quickly remedied, especially if the loan request was denied because of issues with the property in question or concerns related to the individual’s financial history. In these cases, it may make the most sense to focus on the non-bank lending options that can offer the best alternative solution.
Small business owners and real estate investors have plenty of decisions to make when it comes to their commercial mortgage. But their first decision should be to commit to securing the best possible solution for their unique set of needs – then their lender search can truly begin.
Leslie Smith is Managing Director of Commercial Direct. She led the launch of Silver Hill Funding in 2016, and is building on that experience to spearhead the launch of the consumer-facing direct lender, Commercial Direct.
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