Important things to know about commercial real estate loans
Posted On April 2, 2021
Commercial real estate loans are considerably different compared to residential loans. In reality, they are much more complicated, as they have terms and conditions that are very different compared to residential loans. This is one of the reasons most investors fear entering the commercial real estate market.
Smaller residential real estate investors are generally limited to four to ten properties that are valued in the hundreds to thousands of dollars before lenders conclude that it is risky enough and that no more loans will be made. Loan requirements for commercial properties can vary significantly between private lenders and banks. Also, the loans held in the portfolio of a single lender may vary based on the risks perceived by the lenders.
Commercial bank loans
Banks typically want you and you and your partners to provide a minimum of 20-25% of the property’s value as a down payment. For example, if the property value is RS 4 Cr, you will have to contribute RS 80 Lakh-1 Cr as a down payment. Additionally, recent research has shown us that most businesses have failed due to lack of adequate capital to meet needs.
For that reason, banks often require the business to maintain a significant cash reserve that can be used if cash flow is not adequate to make loan payments. This financial requirement is in addition to the hefty down payment. One strategy some business investors use is to borrow as much money as they can (even at a higher interest rate) to provide enough capital to develop the business and therefore increase cash flow.
Private business loans
Private lenders or non-bank lenders often offer less stringent requirements for business loans. There are some lenders that require a lower down payment (range 10-15%). These lenders often agree to carry over the loan amount for up to 20 or 30 years until it is paid in full (in most cases). However, they charge a slightly higher interest rate compared to banks (1% or 2% higher than bank rates).
But when you do all the math, the higher interest rate may not seem as expensive as it does the first time. Calculate the cost of a higher interest over the loan period and compare it to the cost you pay to open a new loan (2-3 times as balloon payments are due).
The emergence of private or non-bank lenders is challenging banks in their traditional lending conditions. While banks continue to tighten the requirements to sanction the loan, these private lenders are moving towards a higher participation, as it facilitates qualification. So if you are looking for a smaller business loan (less than 15 Cr) or a medium loan amount (less than 35 Cr), consider taking your time to find the lenders who can offer you the acceptable time and term constraints. .