Commercial Real Estate Loan Basics For Small Business Owners
The most challenging aspect in commercial borrowers reacquainting themselves with the “basics” for commercial mortgage loans is likely to be the need to not only focus on the “old basics” but also on numerous “new basics” created by a massive shift in commercial loan services. There have been surprising difficulties and changes for small business financing, and this is particularly illustrated by the current commercial banking climate for commercial mortgages. Because the issues currently impacting commercial real estate loans are so widespread and effecting business borrowers everywhere, it is appropriate for business owners to “get back to basics” before they finalize any new business loans.
The net result of the changes and challenges involving commercial mortgages is that effective commercial real estate financing is becoming harder to find. 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. Because of the recent ineffectiveness that prevails with commercial banking, obtaining commercial mortgages can no longer be taken for granted by small businesses. 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.
One inescapable “new basic” for commercial real estate loans is that fewer banks are providing this kind of financing to small businesses. 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. As noted above, a particularly annoying (and growing) trend is that banks are not generally being straightforward in telling prospective commercial borrowers that they have reduced their commercial loan activities. A large number of banks received government bailouts that helped to keep them operating, and now these banks are more intertwined than ever with political influences. Very few banks have actually followed through on the promise to return to a “normal” level of lending once they received bailout funding.
Another “new basic” that seems likely to prevail is a reduced amount of leverage for most small business loans. 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. In terms of the growing challenges with commercial refinancing, the points made in that article are directly relevant to this discussion. Even though a small business owner might feel that they can obtain needed cash by refinancing an existing commercial mortgage loan in which they have substantial equity, our primary point is that any current effort to refinance a business loan is likely to be much more difficult than expected. When commercial real estate refinancing cannot be obtained, commercial borrowers should consider a working capital loan as a “Plan B” solution.
Stephen Bush is a small business financing expert who has worked with business owners for 30 years. AEX Commercial Financing Group provides business cash advances and small business finance programs
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