When you’re looking to finance a commercial real estate property, there may be some better short term options available than the bank.

Let me explain.

The commercial property financing process with an institutional lender is a time consuming process.

More specifically, it will likely take 60 to 90 days from the time you apply for a commercial mortgage to the time its approved and funded, or even longer.

Banks and institutional lenders are the preferred sources of commercial property financing because of the lower rates they can offer, and when you’re working with a mortgage at or above million dollars, every percentage point is going to be important.

But even more important is getting financing in place when you need it so you can avoid 1) missing out on a property acquisition, 2) take advantage of a profit opportunity, or 3) avoid incurring a cost.

Business financing should always be about the net cost of funding, not just the stated interest rate. And when it comes to getting something done in a hurry or in a predictable period of time, banks and institutional lenders are not that predictable in terms of indicating if they will fund a deal, and then when it will actually be funded.

So if time is of any concern to you when arranging a commercial mortgage, you may want to consider a private mortgage lender before even going to the bank.

Why?

Because a private lender can potentially get the lending / funding process completed in 30 days or less, providing an avenue to get capital in place when required, even if you have to pay a bit of a rate premium to do so.

And in today’s market, if you have a great piece of property and the loan to value required on financing is under 60%, the private mortgage lending rates can come very close and in some cases rival what a bank or institutional lender could provide.

Then, with business financing in place, you can take your time surveying the market and getting the best available deal where you are in control of the process and not in a take it or leave it type of scenario with time running out on the clock.

This is where the net cost of the transaction comes in.

If you end up paying a few extra dollars in interest over a year or two, but end up saving or making ten times that amount or more from having financing in place when it was required, then the cost of a private mortgage becomes cheap compared to the cost of not having the financing in place when you needed it.

If you’re at all pressed for time when trying to finance a commercial property, it can be very dangerous to assume that you won’t run out of time with a bank or institutional lender, or that the terms and conditions you’re going to sign up to for the long term are going to be acceptable to you.

There can definitely be a significant benefit attached to the potential incremental cost of an asset based loan and at the very least, the incremental cost is insurance to make sure your deal get done, or funds are available when they need to be for other purposes.

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Business Financing Requirements

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Most of these financing requests are either for securing incremental capital for business operations or refinancing a banking relationship where the bank has demanded repayment of the outstanding facilities.

In both cases, the business financing challenges are significant to due to poor near term financial performance, high levels of unsecured debt, and strained overall credit.

Getting the bank to provide additional credit or to work with the business through a down turn can be difficult if not impossible.

In many cases, the long term business survival requires the use of alternative financing sources that will require higher financing costs that relate to higher levels of risk.

If the business owns real estate, the cheapest possible financing solution is private mortgage financing of commercial property.

By the time other financing sources are being considered, the business is already in a cash flow crunch and time is of the essence, which plays well with the private mortgage options as they tend to be able to be put into place much faster than conventional commercial real estate mortgages.

But private mortgages are also far from automatic for commercial property.  Unlike residential property that can predictably be resold within a certain value range within a certain time frame, commercial property can take years to sell if the lender was required to take action against the security to receive repayment of a mortgage.

So while private lenders are not going to be as fixated on all the near term financial red ink, they will be interested in the property value, the strength of the resale market, and the business’s prospect’s for a short term turn around.  Because private funds are typically only provided for one or two year terms, the lenders need to see that the potential exists for a viable exit strategy at the end of the mortgage term at which time the borrower would transition back to a conventional commercial property lender at lower rates.

Private mortgages do cost more money, but this is a trade off to assure that the business is not interrupted or shut down which can happen if the business owner is overly persistent seeking cheaper forms of financing that take longer to secure and are harder to get in place when the business is in a distressed or semi-distressed state.

If you find yourself in this position and would like to explore private mortgage financing options, give me a call so I can provide a free assessment of your most likely options.

Click Here To Speak With Business Finance Specialist Brent Finlay

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