If you run a business that has good commercial real estate in your asset mix, then you need to make sure that you’re getting the best value out of the leverage that real estate can provide.
Regardless of whether you’re trying to arrange business financing for across your business entity or just focusing on getting a commercial mortgage for piece of property you own or are trying to acquire, don’t underestimate the power of the real estate security that is being offered to the lender.
When you’re looking at full balance sheet financing through an institutional lender where A/R, inventory, equipment, and real estate are being collectively leveraged to provide you with the amount of financing you’re looking for, the strength of the real estate will impact both the overall rate and total leverage you will receive.
Unfortunately, many times business owners don’t break things down fine enough to understand what the real estate is contributing to the financing package and in many cases do not receive optimum financing value from the commercial property or properties they own.
The same is true for arranging a stand alone mortgage on a single property where the offerings you get back from bank or institutional lenders may not be considered optimal or superior to what you should be able to acquire.
This is one of the main frustrations of commercial financing in that commercial lenders are totally portfolio driven, so if their portfolio has a higher risk rating than its supposed to, or they already have a lot of your type of property in their investment mix, the offer they make isn’t going to be as strong as compared to when the portfolio is balanced more in your favor.
And if you’re not in a highly competitive market area, there may not be a lot of other options to chose from. Or even if there are, you may not have enough time to go look for another option right now.
One solution to this type of situation is to consider a certain amount of asset based lending from private mortgage lenders.
In certain situations, private mortgage lenders may be offering very similar rates to banks or institutions, especially on grade “A”properties pledged by solid borrowers.
Under these circumstances, you may be better off going private for one or two years, giving you time to locate and secure a better commercial financing deal where you’re getting full lending value for your real estate.
In the short term, if the private lending rate is comparable to the institutional rate, you’re not really losing anything on cost, and on cash flow you’re likely paying interest only to service the debt which makes more cash available for other things.
Many times private commercial mortgages can be arranged with no prepayment penalty after a certain number of months, so when you finally have the bank or institutional deal you’re looking for, you can pay out the private lender at any time.
This strategy has the potential to create a significant cost saving to you in the long term, especially when you’re talking about higher leverage and interest rate differences of 0.5% or higher over time.