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It is not unusual to find that business lenders and business loan brokers are not as forward-looking about commercial financing difficulties as most borrowers would expect, and I have published another article about commercial lenders to bypass. The focus here is on some of the typical commercial loan difficulties often overlooked by commercial lenders and borrowers. Unexpected circumstances can create chaos with business financing, and commercial borrowers should be prepared in advance for these commercial loan possibilities. There are a number of business financing problems to be avoided with a commercial loan. Difficulties with a typical business loan are probably more common than most commercial borrowers realize. A few of these business financing problems will be unavoidable, but in most cases these commercial loan challenges can be met successfully. Business borrowers and their advisors will be better prepared to take appropriate and timely corrective action by properly anticipating these recurring commercial financing difficulties. (1) Proactive Commercial Loan Example Number 1: Seasoning of ownership and sourcing-seasoning assets. This commercial mortgage difficulty will not matter to all borrowers. When it does apply, business borrowers should insist on a lender without seasoning and sourcing requirements. Many commercial lenders will request business borrowers to document the source of the down payment (sourcing). Commercial lenders sometimes require that funds for a commercial mortgage down payment be verified, often for a period of up to 12 months (seasoning). If a lender imposes a minimum time a commercial property must be owned in order to refinance, this indicates seasoning of ownership. (2) Avoidable Commercial Mortgage Scenario Number 2: A borrower wants to use subordinated debt (a seller second or other secondary financing) in order to acquire a commercial property with a smaller down payment. Many forms of business financing will not permit a seller second or other forms of subordinated debt. With a commercial loan via non-traditional business lenders, a commercial borrower can use subordinate financing (including seller seconds) to reduce the amount of their down payment. (3) Difficult Business Financing Situation Number 3: A commercial loan that won't work without long-term financing. What is long-term financing for a commercial loan? Some commercial lenders view 3-5 years as the longest period before business financing will be subject to a balloon payment. If you think that describes short-term commercial loan terms rather than long-term, you will be pleased to discover the lenders that will provide 30-year business financing. A long-term business loan will frequently be the factor that creates a successful commercial investment scenario because a new commercial mortgage will not be needed for many years and monthly payments will be substantially decreased. (4) Difficult Business Financing Situation Number 4: Commercial loan recall possibilities. Commercial mortgage recall terms frequently permit the lender to call the loan (forcing the commercial borrower to repay early) prior to the expiration of the loan. This issue is not of concern to commercial borrowers whose business loan does not contain provisions permitting the lender to recall the loan. Many traditional commercial lenders routinely place recall clauses in their commercial loan conditions. The terms which can cause a recall will vary but will commonly include periodic lender review of financials and credit history. Under these circumstances if prescribed levels of income and credit standards do not occur, then the lender will typically notify the commercial borrower that they must pay off the loan within a 30-90 day period. Contingency Plans for a Commercial Loan Recall: When confronted with a commercial mortgage recall notification, borrowers will have little recourse other than to seek refinancing. When considering alternative sources of business financing, prudent borrowers will eliminate potential lenders that impose similar recall provisions in new financing. To avoid a potentially disastrous recall scenario, commercial borrowers would be wise to consider only commercial loans which do not have recall terms. For commercial borrowers who have recall provisions in their business financing agreement, it will be equally wise to consider refinancing their business loan before a recall occurs so that refinancing is accomplished according to the commercial borrower's timetable. Copyright 2005-2007 AEX Commercial Financing Group, LLC. All Rights Reserved.
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