Small Business Loans Worst Case - Inappropriate Terms

In a recent AEX small business financing report describing several specific factors which often result in a worst case scenario for commercial loans, we included inappropriate and non-competitive commercial funding terms. This particular situation appears to be occurring with an increasing frequency that is of special concern when we review the current lending climate for business loans.

In response to the recent credit crunch, many commercial lenders have dramatically changed their approach for commercial financing. This is particularly true for numerous regional and local banks.

While some of these lenders have simply stopped making new small business loans, numerous business lenders have continued making commercial loans but have essentially worsened the terms offered to business owners. To avoid this part of the worst case scenario for commercial real estate loans and business financing, it is recommended that commercial borrowers look beyond their local market for appropriate loan terms.

The Biggest Risks for Commercial Real Estate Loans

In any business investment, it is wise to assess all major risks before proceeding. The biggest obstacle to doing this is often a misunderstanding of what those risks are. With commercial real estate financing, it is very common for borrower risks to be understated in part because of incorrect assumptions about the lending process. AEX Commercial Financing Group believes that the increasing number of inexperienced business financing advisors has created a special investment risk that any prospective commercial borrower needs to evaluate thoroughly before the lending process even begins.

There are special complexities and risks involving commercial loans when SBA financing is involved. Some major lenders have recently ceased SBA lending activities because they misrepresented key aspects to both borrowers and other parties.

One of the most important elements in effective business loans is the length of financing. A little-known risk for many commercial borrowers is the increasing lender use of recall provisions for commercial real estate loans. This can lead to a sudden and unexpected requirement by the commercial lender to repay the loan much earlier than anticipated by the business owner. Needless to say, such circumstances are more likely to benefit the lender than the borrower.

Our candid and practical approach to risks such as those noted above is to use an individualized and highly-specialized small business funding strategy for each commercial borrower.

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Interest Rate Changes for Business Loans

Business owners should generally avoid working capital financing strategies based primarily on obtaining a lower interest rate. I have regularly advised commercial borrowers that the lowest interest rate is rarely the "best" rate. Because this observation might be confusing to some, I would be happy to have a conversation with anyone about business financing for a new business acquisition, existing commercial loans or possible refinancing for either a commercial mortgage or business opportunity loan.

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Business Financing - Recent Trends With Good News and Bad News

Out of the bad news surrounding residential property values and mortgage financing during 2007, one of the good news trends has been a growing realization that business opportunity investing is a key strategy to consider if an investor wants to avoid real estate ownership. This development was one of several key observations made in my recent review regarding both positive and negative business finance changes during 2007 that will directly impact commercial borrowers in 2008.

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Mortgage Training and Working Capital Management Updates

Working capital management issues provide some of the most significant recent developments impacting commercial real estate investment loan strategies. An equally important event has been the growing number of inexperienced loan officers involved with commercial mortgage and business financing services.

AEX Commercial Financing Group will be providing a series of overviews concerning both positive and negative business finance issues that should be required reading for all prospective commercial borrowers as well as borrowers contemplating refinancing for their existing commercial debt.

Article from SubmitYOURArticle: 5 Rock-Solid Real Estate Investment Strategies

Title: 5 Rock-Solid Real Estate Investment Strategies
Word Count: 901
Author: Peter Dobler
Category: Finance & Investment

Copyright © 2007 Peter Dobler

Investing in real estate is more complex than simply buying and selling homes. To help new real estate investors to decide which strategy might work for them I put together 5 rock-solid strategies. It is up to you which strategy you feel more comfortable with.

1. Buy and Hold

This real estate investment strategy is commonly known as rental properties. Becoming a landlord is easier than you think. You buy a property, you advertise it as “for rent” and you sign a contract with your new tenant. That’s where the love story ends. You need to know a lot about your duties and your rights as a landlord or you will find yourself in trouble.

Screening your prospect tenants is your first line of defense. Protecting your property from damage is your first duty. I might paint a little bit dark picture of being a landlord. But dealing with tenants can be the most frustrating job you ever had. Do yourself a favor and visit a bookstore or library and get as many books on landlording as you can get. Armed with this knowledge you will be able to create a positive cash flow and a long term relationship with your tenants every time you put the “For Rent” sign in the yard.

With the buy and hold strategy you basically have 3 income streams going at once.

Amortization; while paying your mortgage you also lower the amount you owe.

Appreciation; while owning the property it increases in value.

Tax incentive; as a landlord you will be able to deduct your investment cost over several years. (See you tax advisor for professional advice).

Based on this information you can easily see that even if the rent doesn’t cover 100 % of your mortgage payment you will still be able to create a positive cash flow.

2. Flipping

This is the art of “buying” and “selling” real estate investment without actually taking ownership. In a flip situation real estate contracts get assigned and the person who assigns the contract to someone else typically gets a commission for their services. That’s how you can make money with real estate without credit checks or no money down. Because you never take possession of the property, you don’t need to apply for a mortgage.

You only need 2 things to be able to flip a home. First, you need to find an attractive property that will sell very quickly. Second, you need to find a buyer within a very short period of time. Typically 2-3 weeks. Then you simply flip the contract to the new buyer and you will collect your commission at a so called “double closing”.

This sounds complicated at first, but with a little bit practice you will be able to create a nice income from this. By the way, this is the preferred concept of most real estate “gurus” who appear in late night infomercials.



3. Rehabs

Rehabs are the most risky form of real estate investments. You hunt for a cheap, run-down property and you hope that your preliminary remodel cost estimates will leave enough room for a nice profit. Well that’s the theory. Most real estate investors are failing with this type of strategy.

You either didn’t get the property cheap enough to make a profit or the damages are more extensive than estimated which will offset the cheap purchase price. To make matters worst. If during the rehab phase of typically 3-4 months the market is going south all bets are off. Trust me, I made my share of experiences with this and I told myself, never again.

4. Commercial Real Estate Investment

What comes to your mind first when you think of commercial real estate investment? Big factory complexes, shopping malls or maybe huge office buildings. Well, my answer is much simpler. Anything bigger than a 4 unit apartment building, some call it fourplex, is considered commercial. The great thing with commercial real estate is that the value of the property is determined by the rent income it generates and not by how crazy people are going with bidding on residential real estate.

Theoretically there’s no such thing as sellers or buyers market for commercial real estate. I wrote a complete article about the pros and cons of commercial real estate. So I keep this brief. Personally I love commercial real estate. Of course, commercial real estate is more or less off limits for beginners, because commercial real estate lenders want to see some form of prior experience in real estate investments. However, if you got some experience, go for it. As an added benefit; the competition is far less.

5. New Construction

This is the most affordable and easiest way of real estate investment. Getting into the earliest phase possible of a new development is a sure thing to make money. Keep an eye on the market and you will be able to sell your new home before construction is finished. The construction companies don’t like this, so they limit the number of homes an individual can buy. Even so, keep one or two homes constantly under construction and you will make some nice profits. Of course this works only in a sellers market. Stay away from this strategy in a buyers market or when you see big changes in the local real estate market.

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Peter Dobler is a 20+ year veteran in the IT business. He is an active Real Estate Investor and a successful Internet business owner.
Learn more about real estate investments at http://www.doblerproperties.com

Business Financing and Commercial Loan Lenders to Avoid

One of the most serious business financing scenarios is a lender that causes difficulties for their commercial borrowers on a regular basis. It is specifically this kind of commercial lender which informed commercial borrowers should be prepared to avoid unless realistic alternative commercial mortgage business loan options are totally impractical.

I have been advising business owners for many years, and I have encountered many commercial loan situations which have involved commercial lenders that I would not recommend as a result. This conclusion is typically based on an obvious pattern of lending abuses by select business financing providers.

This business loan strategy article will describe the importance of avoiding "problem commercial lenders". The article will not name specific lenders to avoid, but key examples will be provided to illustrate why prudent commercial borrowers should be prepared to avoid a wide variety of existing commercial lenders when seeking viable commercial mortgage and business financing strategies.


Worthless Business Loan and Commercial Mortgage Pre-approvals

Commercial borrowers frequently want a commercial lender to approve their commercial loan at the earliest possible point. The assumed benefit to this early commercial mortgage approval is that it will enable the commercial borrower to make other business plans which depend on the business loan being finalized.

Any form of commercial mortgage approval will be treated as a binding action by ethical lenders. Commercial borrowers should expect that a valid approval will not be regularly issued in a day or so.

Since this approach to pre-approvals frequently produces surprises for the commercial loan borrower, borrowers must be extremely wary of any commercial lenders that use this approach. There are several business lenders who provide this shortened and misleading version of a pre-approval within a few days of receiving initial applications.

Why should a lender use a questionable commercial loan pre-approval? Here are two primary possibilities. (1) To encourage the borrower to end their consideration of other commercial lenders. (2) To use a business financing pre-approval that is like a residential mortgage structure.

Since many commercial mortgage loans are arranged by residential mortgage brokers who are frequently unfamiliar with common business loan procedures, this reason will be especially applicable when dealing with commercial lenders that specialize in dealing with residential mortgage brokers. This type of commercial lender should be avoided at all costs for most business financing situations.

Commercial Real Estate Financing - Yes or No?

I have previously published a report which describes the unfortunate practice of some regional and local banks to say "yes" when they mean "no". These banks will often impose excessive business loan requirements for commercial financing rather than reject the loan. Commercial borrowers should pursue other commercial loan choices rather than agreeing to business financing terms that are unacceptable.

Commercial Real Estate Loan and Business Loan Options: Think Outside the Bank

In smaller metropolitan markets, it is not unusual for a dominant commercial lender to impose harsher commercial loan terms than would typically be seen in a more competitive business financing market. Such commercial lenders routinely take advantage of a relative lack of other commercial lenders in their local market.

For many business lending scenarios, a non-local lender can probably provide better business loan terms because they are normally competing with other business lenders. It is not wise for borrowers to rely upon local banks for most business financing requirements.

Commercial Property Commercial Loan Appraisals

For a business loan based on commercial real estate value, commercial appraisals are an essential step in business loan underwriting. A commercial mortgage appraisal is typically expensive and lengthy. Bypassing problematic lenders which have exhibited a pattern of commercial appraisal abuses will help the borrower by saving them money, time and frustrations.

Commercial Real Estate and Business Opportunity Investment Financing

A problematic investing climate for residential real estate has increasingly inspired investors to consider investment in commercial real estate and business opportunity situations. This article will offer some background about possible advantages of purchasing commercial investment property or buying a business plus an overview of primary commercial real estate financing and business finance options.

Unique Business Investing and Real Estate Investment Situations

Business opportunity and commercial real estate investment property options include special purpose businesses such as gas stations and motels. The distinctive elements of these unique business investing options can be converted into added management possibilities for providing added value by differentiating a commercial property or business.

Of course specialized business real estate investing does require special purpose business finance solutions such as golf course financing and funeral home financing. The ability to arrange a business loan or business opportunity financing that is appropriate for both the business owner and the business itself will be a critical ingredient in business investment success.

SBA Loan for a Commercial Mortgage and Business Opportunity Finance

The possibility of using Small Business Administration financing is a business financing alternative not applicable to residential real estate financing. An SBA loan is a business finance option typically viable for new business owners and can be critical in acquiring commercial investment property or a business opportunity.

Business Opportunity Finance Choices to Avoid Real Estate Investment

Acquiring a business opportunity excludes commercial property investing. Without real estate, the business loan value will be primarily determined by the business instead of real estate. The lack of a commercial real estate loan can end up being a profitable advantage in a falling real estate investment environment.

How Income Effects Value of Commercial Property and Businesses

Commercial real estate financing and commercial financing will require an appraisal that reviews historical income data. Residential investment property appraisals are primarily driven by location. Business opportunity value and commercial real estate valuations are primarily impacted by business income data. Because of this simple but important difference, valuations for business opportunities and commercial business are likely to be insulated from real estate property value fluctuations.

Business Financing and Commercial Real Estate Financing

There are more key differences between residential real estate investment and commercial real estate investment than realized by most borrowers. Some key factors will be included in this business finance discussion and remaining commercial loan factors are analyzed in additional reports. Overall there are more than 20 key business loan differences compared to residential financing.


Stated Income Business Loan Options

Unlike residential mortgages, no documentation or no doc loans are not an option for business financing. Stated income business finance alternatives will avoid the requirement for an individual to provide personal tax returns. In spite of this benefit, the stated income business loan process will not avoid the requirement to document income for the business being refinanced or purchased.


Down Payment for Business Opportunity Financing - Business Finance

Down payment requirements for buying a business commonly vary from 10% to 25% or more. The specific amount will depend on business experience of the borrower, requirements for business opportunity business finance, type of business and credit scores.

Size Restrictions for a Business Loan and SBA Loan

Commercial property loans and business opportunity financing less than $100,000 are not routinely available. A typical maximum for a stated income commercial mortgage is $2 million. Several common business financing possibilities are limited to a $5 million maximum.

Commercial Mortgage Interest Rate Expectations

Business finance interest rates are commonly more than residential financing interest rate levels, with an average current range of 8% to 12%. It is usually feasible to have variable and fixed business loan rate choices. Financing for a business opportunity will usually have higher interest rates which are generally in the range of 1-3% more than a similar commercial mortgage.

Commercial Mortgage - Business Finance Personal Guarantor Requirements

A personal guarantee from all principal owners is usually a standard requirement for business finance situations even when a business is titled under corporate ownership. Because of this, individual credit scores of the business owners will be an important factor to qualify for a business loan. Individuals should expect to personally guarantee a commercial mortgage if they own over 20% of a business.

Appraisals for a Commercial Mortgage or Business Opportunity Financing

Business finance value is significantly determined by analyzing the income generated by the business rather than the residential appraisal approach of reviewing comparable property values. Business opportunity and commercial property appraisals are much more costly and detailed than residential appraisals and routinely involve about a month to finalize.

More Business Finance Differences

There are more important distinctions between commercial mortgage situations and residential mortgages than described here. Commercial borrowers interested in a more comprehensive discussion about recall or balloon terms for commercial financing, special purpose commercial property financing, refinancing an SBA loan, buying a business opportunity and how to avoid major business financing problems should see the additional reports we have prepared on this topic.