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How Commercial Loans Work Business people borrow money mainly for many reasons, but normally the common reasons are money as working capital, money to expand an existing business or money as a leverage equity in a commercial real estate venture. If it’s your first time to apply for a commercial loan, the process is not the same as applying for a home mortgage loan. How the lender provides his/her loan terms is a variable operation, but some lenders will go a level higher as to require an evaluation of the applicant’s company worth, including the commercial properties owned, as these are required collateral for a bigger amount of commercial loan; however, in general, most lenders charge high interest rate in commercial loan applications than a home mortgage loan. Before meeting the loan terms, an applicant must do research on the payment schemes of the different banks, since all bank loans require the borrower to pay the commercial loan much earlier than the due date for reasons that the banks include what is termed as a balloon repayment method, which is a procedure for a borrower, who for example applies for a 30-year loan, is required to pay the principal and interest, spread out for the next few years, maybe up to 10 years, and pay the entire balance in one balloon repayment. Following this form of payment arrangement, borrowers, who find it difficult to meet up this requirement, may be compelled to take the option of applying for a re-qualification of their loan or re-financing their loan at the end of the balloon term. The risk factors must be carefully weighed out, considering that the entire loan balance is required to be paid in full, to include possibilities of the following scenarios: experiencing a cash-flow problem in the years immediately preceding the balloon term, to which the lender may require a higher interest rate; the possibility of the borrower not to be granted for another loan; the borrower’s properties may be foreclosed for non-payment of the balloon repayment amount. it is also good to consider the commercial loan offers of non-bank lenders who can be less stringent with their requirements, such that some non-bank lenders can provide long-term commercial loans without a balloon repayment but at a higher interest rate than those of the banks.
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When the repayment options have been clearly analyzed by the borrower, the next step is to assess what would be the right amount to be loaned with respect to the borrower’s financial needs, as well as with respect to the bank’s loan terms. It is also imperative for the borrower to evaluate first two considerations: how much cash is the bank likely to grant and how much money should the borrower make available to repay the structured loan. Other bank loan requirements must be incorporated into a borrower’s evaluation process, and these requirements are: banks will require a down payment of 20-25% based on the amount of loan being applied; loan terms vary depending on the loan amount being applied, as well as the classification of the kind of business of the applicant; bank loans prohibit second mortgages.The 10 Best Resources For Funds