Below is a description of commercial loan programs that are still available throughout the market and are still closing in this credit crisis.
Commercial Loan Program #1 – SBA Business Loans
SBA loans are the most readily available form of financing in the industry for small business owners. The programs have received a considerable amount of press lately as well as a considerable amount of help from the government, via the Stimulus Packages. Bottom-line, despite the criticism and confusion around the program, SBA financing is a serious option to help entrepreneurs finance real estate, equipment, inventory, working capital, debt consolidation, renovations, and construction.
Benefits include the highest level of financing in the business at 90%, long amortization schedules and low rates. There are two main loan programs, the SBA 7a Loan and the SBA 504 Loan.
Commercial Loan Program # 2 – Conventional Bank Loans
Meaning commercial mortgages that are offered and funded by banks, and that the loans are not backed or guaranteed by the government. These loans are funded and usually held onto by the same bank. And they are not normally sold off onto the commercial secondary market.
Finding conventional lenders in this market is still difficult. Most banks have stopped lending conventionally. They normally try to steer borrowers to the SBA programs. The few banks that are lending conventionally want “Top Shelf” deals and decline the vast majority of loan requests. Loan to values rarely exceed 60% – 65% and amortization schedules are normally less than 25 years.
#3 – Private Money Loans
Private money loans or hard money span a wide range of financing sources, (from high net worth individuals, to groups of private investors, to institutional lenders that are non bank entities). This money is almost always expensive and is based mostly on the assets value, and not as dependent on the cash flow of the business/property.
Due to the credit crisis, commercial hard money loans are ironically becoming much harder to get done. Many industry professionals predicted this category of the business would win out, as banks and other sources of capital pulled out of the market. But, this category has been hammered by dropping property values, lack of financing for new potential buyers of their foreclosed properties and borrower defaults. Many of the nations most prominent private money lenders have gone out of business or have stopped looking at new loan requests until the market returns.
Until property values stabilize the problems will continue. Borrowers should be careful on which lenders they work with, making sure they are reputable, and that they are very realistic about their property values. In other words, the private money lenders are going to beat up what you think the value of the property is and they will only really go to 60% of the discounted loan to value.
#4 – Life Insurance Capital
This is money from life insurance companies. They act as a lender and lend their own capital they receive from insurance premiums. Historically these lenders only looked at Class A type projects, for extremely high net worth sponsors. Loan amounts start at $5,000,000 and go up to the billions.
Virtually all insurance capital dried up at the beginning of the credit crisis. However, they bounced back strongly. If you have at least 30% of post close liquidity, and your loan to value is less than 65% you should look at these lenders. Terms are solid and fixed periods exceed bank financing.