When you’re on the brink of starting a new business and you want to own a property rather than rent, you may need to take out a commercial mortgage. Regardless of where you’re at in the application process, the chances are you’re feeling a sense of frustration. Commercial mortgages are notoriously difficult to get. They come with a higher degree of risk, which means banks ratchet up their minimal qualifying criteria.
Whether you’re worried that you’re about to face a rejected application, or you’ve recently been given a “no,” it’s worth looking at commercial mortgage loan alternatives. They come in three primary formats. When you explore the pros and cons of each one, you can decide whether it’s right for you.
Did you know that more than 100-million people in the United States belong to a credit union? That’s almost one-third of the population. Their allure possibly includes a more democratic approach to finance, lower interest rates, and the ability to make financial savings. Generally, credit unions fall into two categories: those with federal protection and those with private insurance.
If you’re a member of a credit union, you may find that their commercial mortgage loan alternatives are appealing for a few reasons:
- They usually offer lower fees
- As non-profit organizations, the interest they provide is lower
- Acceptance rates are often higher
- They often close the process faster
Like a regular bank, your credit union will need to see a business plan, they’ll expect a deposit, and they’ll look at your FICO score. Although the above makes credit union commercial loans appear like a panacea, it’s worth considering the cons:
- As small institutions (compared to banks) they may offer fewer loan options
- Unless you live near a branch, you won’t benefit from the physical presence of someone who provides support
- Many are low-tech, which means services such as mobile banking don’t exist or are many years behind other financial institutions
Credit unions are a great option if their loan options fit your loan scenario, but some may find them restrictive.
Data from 2017 shows that regional banks are leading the way when it comes to commercial mortgage loans. In other words, they hold a higher share of growth than other types of lenders in the commercial mortgage industry.
Regional banks handing out more commercial lending agreements suggests that they’re easier to borrow from. Additional pros include:
- Recognition of the value of commercial mortgages, which means they may see more potential in your business plan
- You may not need as strong a relationship with the regional bank as you would do with a national bank
- The potential for faster approval times
However, there are risks associated with exploring this avenue, and these may arise from how fast the regional interest in commercial lending has grown:
- There are worries that a bubble is forming, which means mortgages could be riskier for lenders
- Loans are often made available based on geographic interests, so if your business doesn’t fit into a specific niche there’s a high risk of rejection
- To protect themselves against interest rate increases by the Federal Reserve, such banks are less likely to offer fixed-rate lending solutions
Before taking on a regional bank commercial mortgage, consult a financial advisor. Ask them to predict potential mortgage costs if your regional lender faces certain economic situations. If any of the options suggest a rise in interest rates which will become difficult to manage, you may want to step away.
Private & Hard Money Lenders
Private lenders are sometimes seen as the least predictable option when it comes to commercial mortgage loan alternatives. This may be because of the huge range of different candidates who populate this market, ranging from investors you know personally, through to companies and individuals sourced by a professional broker. When you’re not familiar with the latter, it’s natural to feel nervous about exploring this lending source.
One of the biggest pros of an obtaining commercial mortgage through a private lender is that your options broaden significantly. A private money mortgage broker will analyze your business plan before passing it onto suitable candidates. Many private money mortgage brokers take a relationship-driven approach to sourcing your loan, which means they find the best fit for your niche and connect you with a lender that is perfect for your unique commercial loan scenario.
Other pros include:
- You may benefit from flexible repayment terms, such as not beginning repayments immediately
- The lending periods are shorter and they often don’t feature early-repayment penalties, resulting in a less expensive loan
- If you want to acquire the property fast, working with a broker to find the most viable option can mean quick closing times
However, they also have some cons:
- The interest rates are almost always higher than when borrowing from a bank or credit union
- The lender will expect an exit strategy, which means your business plan must be thorough
- You may need to cross-collateralize, which means other properties will be at risk if your business fails
With alternative commercial mortgages, you broaden your options when a regular bank won’t lend to you. Always prepare a thorough business plan, seek professional advice, and consider your options carefully before entering an agreement. When you’re ready to explore private money loans, First Capital Trust Deeds can help you explore your financial options.