Categories
Lending

Commercial vs Residential: A Comparison Between The Transactions

I frequently run across individuals new to the commercial real estate space and their initial comparison is to residential real estate. When they start asking about terms, rates and fees it is clear the base line knowledge is residential. That would be expected, many individuals if they have not gone through with a residential transaction themselves, either know someone who has or at minimum know the basics of the 30 year mortgage or hear what current rates are in the news. Let’s break down some of the basic differences between the two.

Terms

Typically what you see in residential mortgages is the 30 year mortgage, if not the 30 year then a 20 or 15 year. Majority of the time, it will not vary to far beyond that. There are ARM’s but those are not nearly as popular as their fixed counterparts. Regardless of bank or lending institution those the terms will be fairly typical.

In commercial real estate, you frequently have terms with balloon payments and this will vary by institution. The most common is the 5/20, a 5 year term with an amortization of 20 years. The amortization of 20 years, provides a monthly payment, as if the mortgage was being paid off over a 20 year period. After that 5 year term, you can pay the mortgage off or what most people do is refinance into another 5/20. Residential lenders have fairly standard terms on mortgages, that will not always be the case with lenders on commercial real estate. Some banks prefer to offer a 25 or 30 amortization on a 5 year term. Other banks might want to offer a 15/15 term and amortization. Much of what terms offered will be based on a lenders credit risk appetite and business cash flow to support the mortgage.

Rates

Residential mortgage rates will vary from lender to lender and will be subject to risk factors but in many cases market forces will set the initial base line. External forces moving rates would be the bond market, inflation, other Fed monetary policy. Internal forces that could affect the rate and ones the borrower can control would be, debt to income ratio, credit score and loan to value.

Rates on commercial mortgages will traditionally be higher than residential mortgages. You will see a higher level of competition on rates as well. If a bank wants to win a deal they will be more flexible with the rate offered. In a similar manner there are external forces that will determine the rate on commercial mortgages. They could range from Fed rates, bond markets, lender risk appetite, commercial real estate market and property type. Internal forces impacting the rates, will be business cash flow, business debt, LTV, collateral and personal liquidity. The greater your ability to lower the risk profile on your loan the greater your opportunity to impact rates and terms.

LTV

Most residential mortgages will allow for a pretty low down payment and their are a variety of programs out there that can assist. You can easily have a 95% LTV mortgage on residential real estate and it would not unheard of. PMI also allows for a buyer to come in with a lower down payment.

In commercial real estate, there are opportunities to put less down, but 25% down is industry average. When putting less than 25% down, it will stem from either the borrower using an SBA loan, where you can go as low as 10% down, or the lender is comfortable going with less than the 25%. There is no PMI for commercial mortgages and so the down payment is likely to be a hard and fast starting point.

Fees

Fees on residential real estate can be nominal compared to the overall mortgage transaction. Between appraisal, title, inspections and any other closing fees, you can look at closing cost below $5,000. It should be noted that some of those fees are going to be contingent on the sale prices of the house and thereby the large the purchase or mortgage the higher the fees. Commercial fees will be much higher. A clear comparison are the appraisal fees. Residential appraisal will probably not be much higher than $500. Commercial appraisals are not likely be start less than $2,000. Very quickly you will see fees on commercial real estate start to move about that $5,000 mark.

Pre-Approvals

Pre-approvals are very common in residential real estate transactions, not nearly as common in commercial real estate. They are out there but you are more likely see “term sheets” as opposed to a pre-approval. A term sheet will indicate that the lender is open to the transaction and if it were to move ahead, what the terms of the deal would be.

There are so many factors that determine a commercial real estate deal, we did not even touch on investment real estate, environmental aspects and more. The key is to ensure you educate yourself before going into a commercial transaction. The nuances are many and the deals can very greatly by lender.

About David

David Coletta has 15 years in the banking industry and most recently has worked with businesses earning between $5-$50M a year in revenue.   If you are looking to learn more about how David can assist you and your business please reach out via the contact section.

Categories
Lending Merchant Cash Advances

Merchant Cash Advances

Merchant Cash Advances (MCA) have been an available form of financing for years now.  They are not your typical bank financing but can provide valuable cash flow to a business quickly and on a short-term basis.  In this environment of COVID, banks have become more conservative and retail store locations are under more scrutiny, this form of financing can prove to be a difference maker.  In many instances, to apply for an MCA, a 1-page application is required, verification of 2-3 months of bank statements and a most recent merchant statement are all that is needed to start the process.

MCA’s are not a loan but an advance lump sum payment in exchange for future credit/debit sales.  The lender will request bank statements to evaluate the business cash flow, determine the funding amount and a repayment plan.  Typically funding on this type of financing can be completed in 48-72 hours.  Repayment plans are a daily debit to the business account for a specific dollar amount, for a set number of days/months.  The language associated with MCA’s is not what you would see in traditional bank lending either.  Instead of interest rates you will likely see buy and sell rates or factor rates.  An example would be as follows: you may receive a factor rate of 1.4, which would translate to every $1 received by the business would pay back an additional $0.40 for the use of the funds. 

What has driven the popularity of MCA’s is larger banks have started to shift away from these smaller loans.  An unfortunate consequence of the 2010 Dodd-Frank Act was that small business lending became less profitable for banks.   Traditional bank lending is going to evaluate business cash flow, credit scores and collateral.  That process could take a month or more and requires a significant level of effort to get there.  When options for small businesses are limited, like they are today, all options should be on the table. 

The key for any business is the level of trust you have for those you are working with.  Still Water Solutions has the experience and the network that we trust to help you.  We are always available for a conversation to discuss what your needs are and the appropriate path.  Having worked with business owners for years now we know your time is valuable, and we want to help you make determinations as quickly as possible. 

Please do not hesitate to reach out for a conversation.  We want to be an asset to you and your business. 

If you would like to apply for a financing request please visit here.

Categories
Lending

Business Loan Applications – The Basics

Anyone that has ever applied for a business loan or line knows it can be a long and cumbersome process.  The key to shortening the process and smoothing it out, really goes to how you start the process.  A complete and concise financial package will go a long way.  Much of the back and forth between borrower and lender, that slows the process down, is related to needing additional information, specific documents not being completed and the bank not wavering on anything, because they need to meet all their regulatory standards.  When pulling a financial package together there are some standard items that are nearly always asked for.  Here are a few of those items:

  1. Personal tax returns
  2. Business tax returns
  3. Personal financial statement
  4. Aging AR/AP’S
  5. YTD Balance Sheet and Income statements
  6. Business Debt Schedule

Depending on your request, whether it be a loan, line, real estate or business acquisition there will be some documents specific to that request.   Disclosing potential issues also assists in keeping the process moving ahead.  Bankruptcy, other ownership interests, certain financial transactions can cause additional questions and also bring into doubt the potential borrower’s character as well, if not disclosed early on.  

The most effective way to start the application process is to ensure you have a complete package, have all the documents completed fully and disclose anything that might be questioned during underwriting and respond quickly to bank inquires. 

If you are starting this process or new to it, reach out for a conversation. With 15 years in banking, I am familiar with the banks, how they operate and can assist in the process. 

Categories
COVID -19

PPP – Round 2 Resources

In an effort to simplify the process and help business owners gather information about the new round of PPP in 2021 we will be providing links to training resources and other information as it becomes available.

Update 2/11: Round 2 of PPP is off to a slow start but here are the top national lenders by net dollars lent thru 1/31/21, according to the SBA website. Below is an article detailing some additional information on Round 2 of the PPP.

https://publc.com/content/Businesses-arent-flocking-to-this-round-of-PPP-loans.20856141

Additional notes for this Second Round of PPP, per information gathered from www.SBA.gov:

  1. The maximum loan amount for Second Draw PPP is 2.5x average monthly 2019 or 2020 payroll costs up to $2 million. For Accommodation and Food Services, the max Second Draw PPP is 3.5x average monthly 2019 or 2020 payroll costs up to $2 million
  2. To qualify you also need to demonstrate a reduction of gross receipts of at least 25% between comparable quarters in 2019 and 2020.
  3. The First Round usage will have used or will use the full amount for authorized usages.
  4. Must have less than 300 employees.

Looking for Lenders is a tool provided by the SBA: https://www.sba.gov/funding-programs/loans/lender-match

Update 1/26: SBA is having issues around accepting applications from banks. Patience while going through the process.

Banks press Treasury, SBA to fix ‘systemic’ small business loan glitches – POLITICO

https://www.facebook.com/stillwatersolutions/photos/a.117929726804883/137069471557575/