Commercial Real Estate Loan Basics for Small Business Owners
Some basic old and new guidelines are described in a candid overview of what small business owners need to know before proceeding with their efforts to obtain commercial real estate loans.
The outcome that effective commercial real estate financing is becoming harder to find is the biggest net result of the changes and challenges involving commercial mortgages. This observation applies equally to new commercial loans for buying a business and commercial refinancing efforts. Very few commercial lenders are providing a candid assessment of their inability to provide commercial mortgage financing for a wide variety of small businesses, and this makes the challenge almost insurmountable.
The need for small business owners to be prepared for an extremely difficult commercial lending environment is an intentional emphasis in this discussion. Obtaining commercial mortgages can no longer be taken for granted by small businesses because of the recent ineffectiveness that prevails with commercial banking. Large corporations continue to have more leverage and resources for dealing with their banks. In a mirror image of that situation, small business borrowers are increasingly likely to have less resources and leverage when negotiating with any bank.
Fewer banks providing this kind of financing to small businesses is one inescapable "new basic" for commercial real estate loans. It will frequently be even more difficult to secure a commercial mortgage from a new and unfamiliar lender if the current bank for a business is not willing to help. Nevertheless that is a likely funding scenario that currently confronts business borrowers everywhere. A particularly growing (and annoying) trend as noted above is that when banks have reduced their commercial loan activities, they are not generally being straightforward in telling prospective commercial borrowers. Banks are more intertwined than ever with political influences after a large number of them received government bailouts that helped to keep them operating. Very few banks have actually followed through on the promise to return to a "normal" level of lending once they received bailout funding.
A reduced amount of leverage for most small business loans is another "new basic" that seems likely to prevail. This will mean that borrowers will need larger down payments to buy a business. Especially when combined with decreasing commercial real estate values currently being experienced on a widespread basis, commercial debt refinancing will be more difficult because of the reduced leverage.
We previously published a companion piece describing the need to get back to basics with working capital financing. The points made in that article are directly relevant to this discussion in terms of the growing challenges with commercial refinancing. Our primary point is that any current effort to refinance a business loan is likely to be much more difficult than expected, and a small business owner might experience obstacles in getting needed cash by refinancing an existing commercial mortgage loan even when they have substantial equity. When commercial real estate refinancing cannot be obtained, commercial borrowers should consider a working capital loan as a "Plan B" solution.
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ABOUT THE AUTHOR
Stephen Bush is a small business financing expert who has worked with business owners for 30 years. AEX Commercial Financing Group provides merchant cash advances and small business finance programs.