The 5 Types of Commercial Lending

I thought I'd go back to basics and list the the various types of commercial financing.  Feel free to copy this as a cheat sheet!

Here are the 5 major types:

1. Long Term Commercial Financing
2. Business Loans Not Secured by Real Estate
3. Commercial Construction Financing
4. Commercial Bridge Financing
5. Commercial Hard Money

Typical Long Term Commercial Financing

Term: 5, 10, 15 year terms are most common

Amortization: 20,25 or 30 years. 15 to 20 years of typically fully amortized.

Typical Rates:

• 10 year fixed = 10 yr US Treasury bill rate + 1.1% to 2.0%
• 15 and 20 year fixed = 10 yr Treasury + 1.6% to 2.5%>
• 5 year fixed = 5 yr Treasury + 1.6% to 2.5%
• ARM = LIBOR + 1.7% to 2.5%

 Maximum Loan to Value: Most lenders will go to 75% and in some cases 80%. Depending on the strength of the loan a 10% seller second is allowed.

 Prepayment Terms:

• 5 yr to 10 yr fixed rate loans - typically have a decreasing prepayment each year (e.g. 5%, 4%, 3%, 2%, 1%).
• Adjustable rate loans - typically have a decreasing and smaller prepay (e.g. 3%, 2%, 1%).

Recourse: Longer term loans (typically from life insurance companies or conduits) are generally non-recourse. Bank loans are typically recourse.

Loan Costs: Borrowers are responsible for all due diligence and closings costs (e.g. Appraisal, Phase 1 Environmental, site inspection, title, etc).

 Refinances can roll most of the costs into the loan.

• Loans under $3M - costs range from $6,000 to $12,000
• For loans over $3M - costs can be $20,000 or more

Typical SBA and Business Terms

 Small Business Lending

SBA 7(A) LOAN PROGRAM OVERVIEW

We work with partners who have been designated as a Preferred Lender by the SBA which gives us the authority to make credit decisions on behalf of the US Government. This enables us to process loans more quickly and efficiently than many other SBA lenders. There are a number of advantages to an SBA loan, including longer terms, no points and no balloon payments.

Who is Eligible for an SBA Loan?

Most for-profit small businesses are eligible for an SBA guaranteed loan. This includes manufacturers, wholesale, retail and service businesses as well as independent or franchise businesses.

Loan Qualifications

• Retail and service businesses with sales (3-year average) not exceeding $6 million to $20 million, depending on the industry
• Wholesale businesses with employees up to 100 regardless of sales volume
• Manufacturers with employees up to 500 depending on the industry, regardless of sales volume

SBA 7(A) Loan Size

$25,000 to $2.0 million

Loan Fees

• Loan packaging fee: $500 to $1,500
• Fee is based on loan size, it is collected at the time of loan submission; refunded if declined by credit
• SBA guaranty fee: 1.70% to 2.60% of the loan amount
• Fee can be financed in the loan

Use of Proceeds

• Commercial real estate (purchases, construction, or refinance)
• Leasehold improvements
• Business expansions
• Machinery, equipment, furniture or fixtures
• Business acquisition
• Working capital (offered in conjunction with some of the above)
• Start-Ups (Franchise, Medical Professionals, Franchise Hotels, Gas & C-Stores)

Collateral

• First security interest in all business assets (excluding titled vehicles)
• Personal assets (including residences) may be taken as collateral

Down Payments

• 10% of commercial real estate purchase
• 15% - 20% for business acquisitions
• 30% for business start-ups (see use of proceeds for qualified industries)

Other Credit Considerations

• Business must have adequate historic cash flow to cover the proposed debt
• Business debt to net worth must meet industry averages
• Borrowers must be actively involved in the day-to-day operation of the business
• Satisfactory personal credit histories are required for all principals and guarantors
• No past bankruptcies or felony arrests

Typical Commercial Construction Terms

 Max Loan to Cost(LTC): 80% to 90%

Max Loan to Value: 70% to 80% of completed value

Term: 1 to 3 years with extensions if needed

Rates: Prime + .5% to 2.0% or LIBOR plus 2.0% to 4.0%

Projects: All property types considered. Developer must have significant experience with resume available.

Recourse: Most are fully recoursed, however some will consider non recourse for larger projects.

Typical Bridge Loan Terms

(Rehab or Value-Adding Projects)

Max Loan to Cost: 80% to 90%

Escrows: Some projects will need an escrow holdback until improvements are complete or value goal is reached.

 Term: 1 to 3 years

 Rates: Prime or LIBOR + 1.0% to 4.0%

 Prepayment Penalty: None

 Projects: All property types considered. Developer must have significant experience with resume available.

Recourse: Most are fully recoursed, however some will consider non recourse for larger projects.

Typical Hard Money Terms

Max Loan to Value: 65% to 75%

• Note: Value will be based on both appraisal(if available) and quick sale value.

Term: 1 to 3 years with extensions available

Amortization: Interest Only or 30 years

Rates and Fees: 11% to 15% with 3 to 6 points up front

Escrows: Usually a 12 month escrow of payments will be put aside

Exit Strategy: Very Important! Need a reasonable take out strategy.