Commercial real estate loans are considerably different compared to residential loans. In reality, they are much more complicated, as they have terms and conditions that are very different compared to residential loans. This is one of the reasons why most investors fear venturing into the commercial real estate market.
Smaller residential real estate investors are typically limited to around four to ten properties that are valued in the hundreds to thousands of dollars before lenders conclude that this is risky enough and no more loans will be made. Loan requirements for commercial properties can vary significantly between private lenders and banks. Likewise, the loans held in the portfolio of the same lender may vary depending on the risks perceived by the lenders.
commercial bank loans
Banks typically want you and your partners to put up a minimum of around 20-25% of the property’s value as a down payment. For example, if the value of the property is around RS 4 Cr, you will have to contribute around RS 80 Lakh-1 Cr as a down payment. Furthermore, recent research has shown us that most businesses have failed due to a lack of adequate capital to meet the needs.
For that reason, banks often require the business to maintain a significant cash reserve that can be drawn on if cash flow is not sufficient to make loan payments. This financial requirement is in addition to the hefty down payment. One strategy some business investors use is to borrow as much money as they can (even at a higher interest rate) to provide ample capital to build the business and therefore increase cash flow.
Private Commercial Loans
Private lenders or non-bank lenders often offer less stringent requirements for business loans. There are some lenders that require a lower down payment (10-15% range). These lenders often agree to carry the loan amount over 20 or 30 years until it is paid off in full (in most cases). However, they charge a slightly higher interest rate compared to banks (1% or 2% more than bank rates).
But when you do all the math, the higher interest rate may not seem as expensive as it does the first time. Estimate the cost of higher interest over the life of the loan and compare it to the cost you pay to open a new loan (2-3 times as balloon payments are due).
The rise of private or non-bank lenders is challenging banks on their traditional lending terms. While banks continue to tighten loan sanction requirements, these private lenders are moving toward more participation as it makes it easier to qualify. So if you are looking for a smaller business loan (less than 15 Cr) or a medium loan size (less than 35 Cr), consider taking your time so that you can find the lenders who can offer you acceptable time constraints and term. .
