Finding Parallels Between Services and Life

How Commercial Loans Work

It is common for business people to borrow money for the following reasons: money as working capital, money to expand an existing business or money as a leverage equity in a commercial real estate venture. If you’re into one of these mentioned reasons and it’s your first time to apply for a commercial loan, you should have a different expectation as to how commercial loaning works when compared to a real estate commercial loan. In commercial loaning, most lenders ask for a higher interest rate than rates offered in home mortgage loans and some will even go a level higher as to require collateral for huge amount of loan application, like the business worth and the commercial properties owned by the applicant.

It is important for a commercial loan applicant to weigh his/her options, before meeting up the terms of the loan payment, when he/she gets this general information that all banks require commercial loan borrowers to pay their loan earlier than the due date, because banks require a practice known as balloon repayment, which refers to the method of repayment from the borrower, who owes the bank, say for example a huge loan payable for 30 years, to pay the principal amount with the computed interest in a period of 10 years and, afterwards, pay the entire balance of the loan in one time balloon repayment.

Following this form of payment arrangement, borrowers, who find it difficult to meet up this requirement, may be compelled to take the option of applying for a re-qualification of their loan or re-financing their loan at the end of the balloon term. In any loan applications, there’s bound to make risks, but in the case of the balloon repayment terms in commercial loans, a borrower must carefully consider all possible risk factors, such as: experiencing a cash-flow problem in the years immediately preceding the balloon term, to which the lender may require a higher interest rate; the possibility of the borrower not to be granted for another loan; the borrower’s properties may be foreclosed for non-payment of the balloon repayment amount. it is also good to consider the commercial loan offers of non-bank lenders who can be less stringent with their requirements, such that some non-bank lenders can provide long-term commercial loans without a balloon repayment but at a higher interest rate than those of the banks.

When the repayment options have been clearly analyzed by the borrower, the next step is to assess what would be the right amount to be loaned with respect to the borrower’s financial needs, as well as with respect to the bank’s loan terms. Equally important are the following considerations for a borrower to prepare on hand in his/her calculations: how much cash will the bank likely to grant and how much money should the borrower make available to repay the structured loan. Other bank loan requirements must be incorporated into a borrower’s evaluation process, and these requirements are: banks will require a down payment of 20-25% based on the amount of loan being applied; loan terms vary depending on the loan amount being applied, as well as the classification of the kind of business of the applicant; bank loans prohibit second mortgages.
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