In this series of articles (“Beyond Banks”), we explore borrowing opportunities from ALL sources, not just your traditional bank. To access all the volumes in this series, go to our “Series” page here.
If you are a business owner, it is inevitable that you will need a commercial mortgage loan to fund new endeavors, or perhaps refinance your current debt. When that day comes — whether you are a start-up company, small business, or large corporation — it is important to look at all sources.
While your commercial bank is a great place to start, you should know that you have additional options.
Even more importantly, if you already applied to your bank for a commercial mortgage, but were denied, you still have options.
Knowledge is power. Here are 3 items to keep in mind when looking for a commercial mortgage loan for your business.
#1: Besides my bank, what other commercial lending sources are available to me?
There are two main types of lending sources for commercial mortgages: traditional and non-traditional (alternative).
Traditional sources include banks; life insurance companies and pension funds; loans guaranteed by Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA); and commercial mortgage-backed securities (CMBS) issuers.
According to the Mortgage Bankers Association (MBA), banks continue to be the largest source of commercial mortgage financing, but other sources, such as life insurance companies, are gaining ground.
Non-traditional, or alternative, sources are also gaining ground. These sources include real estate investment trusts (REITS), debt funds, specialty finance companies, and other investor-driven lenders. These alternative lenders work through commercial mortgage intermediaries to originate the loans.
Alternative lending on the rise: According to a survey by the MBA about expectations for originations in 2019, commercial mortgage originators anticipate the greatest growth to come from alternative lenders (such as mortgage REITs and debt funds).
#2: How do I shop around for the best deal?
With so many different types of commercial mortgage lenders, the question becomes, “How do I shop around exactly?”
You have two main options. Go it alone. Or, work with a mortgage broker who will do the shopping for you.
The “go-it-alone” option may work well if you have free time. You can start with your bank to ask about their commercial or business mortgage products. Then, read your local newspaper and browse the Internet for other lenders to contact. Personal references are helpful as well.
The “mortgage broker” option enables you to cast as wide a net as possible. Working with a mortgage broker can save you a lot of time and frustration by doing the shopping for you and matching you with lenders who offer programs tailored to your needs. A mortgage broker can act as an intermediary between you and dozens of lenders.
Additionally, working with a broker gives you access to lenders you otherwise would not even know exist. Many lenders — particularly the alternative lenders — do not advertise widely or work directly with borrowers. Instead, they have longstanding relationships with mortgage brokers who refer them potential borrowers like you.
For more information about the differences between visiting a bank versus working with a mortgage broker, click here.
To get the best of both worlds, you can shop around on your own while working with a mortgage broker.
#3: What kind of commercial loan terms can I expect to see?
The answer depends on the type of lender you are working with, and the type of loan product you are seeking.
Of the different types of lenders, banks are the most heavily regulated. According to the MBA, due to the regulatory oversight, banks have become more tightfisted when it comes to commercial lending.
Generally speaking, if you are looking for competitive interest rates, longer repayment schedules, or higher loan-to-value ratios (LTVs), you most likely will need to look beyond your bank. Similarly, if you are looking for a lender willing to take on more risk and offer a wider variety of loan products, you will also need to look at other sources besides your bank.
For example, as compared to banks, life insurance companies offer longer repayment schedules, such as 15 years. According to the MBA, for life company loans, the average loan amount is $22 million, and the average LTV is 59%. However, some life companies with greater risk appetites specialize in smaller loan amounts (starting, for example, at $1 million) and offer higher LTVs.
Alternative lenders sit on the other side of the spectrum from the heavily regulated banks, as they have the most flexibility of all the lender types. Some alternative lenders are willing to offer LTVs as high as 85% and loan repayment schedules as long as 30 years.
Alternative lenders are also willing to take on risk by offering non-recourse loans. With a non-recourse loan, in the event of a default, the lender can collect the collateral, but may not go after the borrower’s other assets; in other words, the lender has no further recourse.
In terms of particularly risky ventures, alternative lenders are even willing to provide short-term bridge loans to companies that are going through bankruptcy. To find out more about this special kind of bankruptcy lending (known as debtor-in-possession (DIP) financing), read our guide here.
The mix-and-match possibilities of the different lenders and loan products are endless. As just two examples:
- Looking for a construction or renovation loan for your business? In addition to your bank, look for a lender that specializes in Small Business Administration (SBA) loans, or a lender that offers hard money construction loans.
- Looking to invest in multifamily residential properties (5 units or more)? Find a lender that offers Fannie Mae, Freddie Mac, or the FHA’s robust multifamily mortgage programs. Or, look for a lender that offers shorter term bridge loans that are tailored to multifamily investors who want to fix and flip.
If you are looking for a commercial mortgage loan for your business, break the mentality of just asking your bank what they have to offer. Instead, look beyond your bank to all sources for your capital needs. To learn all your options, cast a wide net by shopping around on your own and working with a mortgage broker.
Continue exploring our “Beyond Banks” series:
To access all the volumes in this series, go to our “Series” page here.
David A. Krebs is a licensed mortgage broker offering commercial and residential loan programs beyond your regular bank. Call us at 321-239-2781, click here to submit a message, or click here to book a free consultation.