The world of finance is run by lenders. In this article, we take a look at the first thing you need to know about commercial finance lenders.
The factors involved in the issuance of a commercial loan are numerous and somewhat complex. There are audited balance sheets, debt ratios, loan-to-value ratios, discounts, balloon over amortization calculations, prepayment penalties and, well, you get the idea. Frankly, it can be a bit much, particularly for someone who has never sought out a commercial loan before. Fortunately, there is a way to get your head around all of it.
The key is to understand what commercial finance lenders are looking for in a loan opportunity. It is ultimately a two-fold issue – profits and risk. If you keep these two things in mind, particularly risk, you can get through the process with a minimum of pain and a maximum of funding.
Profit
Banks like to put out advertising touting how much they want to help the little guy, grow business in America, help baby seals and, well, you’ve seen it. These advertisements are all a crock of nonsense. A bank is a for profit business. They people you deal with are looking to make a profit on you. This is fine and the American way, but don’t for a minute think bringing up anything other than the profit they will make on the deal will matter. The fact your business does positives things is irrelevant. Ask yourself how the bank will profit and make sure you have a clear answer.
Risk
Commercial lenders have been crushed with bad loans the last few years. This has made them very risk adverse. All of the hoops they make you jump through are designed to find any hidden risk in the deal. You can try to fight this, but it is a mistake. A better approach is to run all the test yourself prior to applying, find the weak point of the deal and then figure out how to counter that weakness. It might be through additional collateral, paying points or whatever. The key is to have an answer going in because lenders are extremely risk adverse at the moment.
So, how does all of this figure into a commercial loan deal? Well, let’s consider some common ratios that are looked at by lenders. The debt-to-equity ratio is a measure of what? It is a measure of how much of a risk you are to default because of an overload of debt on your business as a whole. The term versus amortization negotiation? This is a measure of how much profit the bank can make with a minimum of risk that you’ll be able to make the balloon payment or refinance the debt at the end of the term. If you run through the various tests and calculations lenders make, you will see they all fit into either of these categories.
Can you get a commercial loan today? Absolutely. The key is knowing how to position it with the lenders.
By: Thomas Ajava
About the Author:
Thomas Ajava writes for CommercialFinanceLenders.com – independent commercial finance lenders.
