Commercial Mortgages

Commercial Mortgages usually involve the financing of a business property such as a hotel, warehouse, retail store, factory, or any other building that is for generating income through manufacturing, sales, or the performance of services. In order to finance the operation, a company or its shareholders must obtain financing for various items such as the building, land, and other sub-structures that are part of the property on which the business is situated. The commercial mortgage may also include equipment that is included as a permanent part of the structure or within the terms of the sales contract much as a residential mortgage lender would finance appliances that were included within the purchase price of the home.

Unlike most residential mortgages, commercial mortgages usually begins at approximately $200,000 and can exceed $1,000,000 easily. The purpose of a commercial mortgage can range from a new purchase to renovations, additions, or a refinance of the original loan. The term of the loan can range from 15 to 30 years and sometimes longer depending on the amount of the loan and the type of business. In most cases, 90-95% financing is available with special programs for those who are credit-challenged or have credit scores below 580. Contingent upon the lender, there may be different requirements for borrowers who are new business-owners even if they have good personal credit. It is likely that a new business owner does not have experience with the high line of credit that is involved with a commercial mortgage and may be required to make a larger down payment or obtain a guarantor in order to finance his venture.

Although most mortgage companies will handle either commercial or residential financing, it’s better to work with a lender who specializes in commercial lending. Many reasons make it sensible to do this including the fact that a lender who specializes in commercial lending will be in a better position to work with a borrower who has weak credit or one who does not have credit experience to substantiate the size of the loan he requires to purchase the business in which he is interested. Not only that, but a commercial lender is more familiar with the commercial market and how it works. He will know if the business venture you are attempting to pursue is one in which he is interested in investing, which, in essence is what the lender is doing when he loans money for a commercial loan.

Unlike a residential mortgage, commercial mortgages do not usually end at the settlement table. Certainly, there may be times when you will return to the lender for additional funds, but with a commercial mortgage, there frequently seems to be a reason for additional funding for many different reasons such as major repairs or renovations, additional workspace, additional manufacturing or warehouse facilities, and much more. Where a residential homeowner would take an equity loan, a business owner tends to favor refinancing since additional funding is usually quite substantial, thus making it more economically feasible to refinance the entire mortgage instead of carrying two separate mortgages. In most cases commercial mortgages cover more than simply the building, so whenever new equipment is added, it tends to be part of the permanent structure or sub-structure of the building.

One of the most difficult tasks that a new or potential business owner must undertake is that of developing a business plan. For the inexperienced owner, he may think that it’s an easy task, and he plans to be making $1,000,000 within six months. The problem is that he is not working with a realistic goal. Your business plan needs to show methods for slow but steady progression for several years rather than a sudden jump from having a deficit to making a huge profit.

In order to write the most realistic business plan, you should consult with an accountant who is familiar with the type of business you are undertaking. If you are buying into an already existing business, the best person to consult is the accountant who handles business for the current owner. He has all of the current information on the business, and unless the sale is forced as in an unfriendly merger, he will be more than willing to share with you the current finances of the company.

Writing a business plan for a new venture will be a little trickier, but if you sit down with your accountant, you can write a plan that has realistic goals. With the expertise of your accountant who knows or is able to research the type of business you are entering, you can come up with a plan that sounds both promising and realistic. Your job is not to write a plan that will impress lenders and investors with quick sales figures because these are business people, and they will know if you have goals that seem unattainable. Showing steady progression over several years will show them that you not only have realistic goals but that you have knowledge of the industry.

One of the most important documents you will ever need when you go into a business is a business plan. The function of a business plan is to show lenders, investors, and other financial experts how you plan to make your business successful. For the new owner, you may want to work with an accountant to develop a business plan that has realistic goals. There is a big difference between buying into a business that is already running than one that you have to build from the ground floor up. Of course, the business plan you develop for each of these scenarios will be different.

For a business that is already established, your goal may be to increase sales and decrease expenses by 5% within the first year. On the other hand, if you start a new business, your goal may be to have 100 employees and sales of $500,000 within the first year. From there, you want to develop a plan for increasing revenue to the point that instead of having a break-even point at the end of the fiscal year, you show a profit. Here again you must be realistic in your thinking and instead of expecting it to happen within the second or third year of operation, develop a business plan that shows a steady increase in profits over the next several years. This type of plan allows the lender to see that you are realistic in your goals, and instead of trying to impress him with a quick profit scheme, you want to show him what you can do over several years. To present any other kind off plan looks fake and unrealistic.

Be certain when you make the appointment to meet with the lender for the first time that you allow enough time to prepare. You want to make sure that you have everything you need before you walk into the lender’s office, and in order to do that, you need to have time to prepare for the interview. This may mean allowing at least a week from the time you set the appointment until the time of the actual interview just to be certain that you will not leave anything incomplete that is a pertinent part of the transaction.

Just like an interview for a job, the first interview with your potential lender will make a lasting impression. If you do not make an impression on the lender, nothing you say or present to him from that time forward is going to make a great deal of difference. Certainly the information in your credit and financial history will have some effect on the lender, but for the new owner who lacks experience, the only thing you have going for you Is the way you present yourself to the lender and the impression you make on him. If you fail at making a good first impression, nothing short of you walking on water is going to sway him in your direction. It may sound petty to say that your personality and the way you carry yourself influence the way a lender perceives you as a commercial customer, but that is definitely one of the determining factors. After all, financial records only tell so much, so in the end, lenders must rely on their perception of the person who is representing the company and whether they appear to have enough knowledge and expertise to make the company successful.

Do not expect to walk into the office of a commercial lender and be greeted with open arms because you want to purchase the manufacturing business down the street that is still vacant after three years. Certainly if you buy the business it is going to create more jobs for the community, but unless you can prove to the lender that you will be able to make the venture work, he is going to be very hesitant to provide funding, especially if you do not have much experience in owning and operating a business.

Before you even make an appointment with a commercial lender, you need to have a business plan prepared and ready for the lender’s review. The purpose of the business plan is to show the lender the potential for the business to succeed and your plan for making it successful. It is not simply a matter of putting everything down on paper and saying that this is what you are going to do because the lender will not accept that. You must detail each detail of your plan for the success of the business, from development concepts through retail sales of the products or services you plan to distribute. An accountant is probably your best source of information concerning plans for making the business work since they an accountant works strictly with numbers. Make your business plan impressive but make certain that it is realistic. For instance, if you are starting from the ground floor as opposed to buying into a business that is already running, don’t tell the lender that you will have a $1,000,000 within a year if you know that is an unrealistic goal.

Before it’s time for the interview, you want to go over the business plan with someone who is close enough to your business to know if you have enough information and whether the information you have shows realistic goals that the lender will encourage. Even if you worked with your accountant to come up what both of you perceive to be realistic goals, it would definitely be in your best interests to sit down with a third party who is not involved in your business plan and see if they feel you are being realistic. This can be a business partner, a former employer, a friend, or a lender who is not involved with the financing of your business venture. What you want to make sure is that you have every detail of your plans in the business plan, and you present it in a way that shows the lender you have the expertise to know what it takes to make the business successful and are willing to do all the works that it requires.

It’s easy enough for anyone to sit down and work out a plan to make a business successful. However, it takes a special person to sit down with a lender and present the plan in such a way that the lender is convinced that this venture is going to be successful enough for the owner to repay the funds that the lender is extending to him for the project. It requires enough business expertise in the area of communication for the two of you to understand each other and your mutual goals. After all, this relationship will start here and continue for many years as the business grows and prospers.

This is one of the most important parts of financing your business. After all, the lender is going to be a part of your business goals for many years in the future, so if you develop a good relationship in the very beginning, it will be easier in the future to call upon your loan officer when the need for additional funding is imminent. Building a relationship with your lender doesn’t mean that you have to join him for lunch every week, every month, or even at all; what it does mean is that you realize and develop the need for a well-developed business relationship. It may mean meeting occasionally for lunch in order to discuss plans for future development of the business since sometimes business ideas are better shared in an informal setting.

Developing a relationship with your lender may also mean that you make sure you keep him informed of any major financial issues pertaining to the company, whether positive or negative. After all, the lender has a vested interest in your business, and as such, he is interested in how the finances are developing and whether you are finding it difficult to adhere to the goals you presented in your business plan. In addition, you must remember that your lender is first a businessperson, and as such, he may be the best person to advice you how to make some of your goals into realities. If you’re having some trouble meeting your sales goals, for example, he may have some ideas for things you can try to increase the potential. If he doesn’t know the answer, he can very well put you in touch with someone who can assist you. Remember, your lender invested in your business, so he wants to help you reach your goals and is willing to lend a hand any time you need assistance.

A commercial mortgage has both seminaries and differences when compared to a residential mortgage. The biggest differences between the two lie in the fact that commercial mortgage finances a business venture and tends to start at about $500,000, whereas in most cases, a residential mortgage is well below $500,000 and finances a primary or secondary residence. A commercial mortgage involves any business that sells, manufactures, or services products for the public such as stores, factories, and any type of service organization including plumbers, electricians, and other types of service-oriented businesses.

Commercial lenders may be part of a bank or mortgage company, but those who will best benefit your business are those who specialize in commercial mortgages rather than those who do both. This doesn’t mean the lender only loans money for commercial purposes, but that a lender at least has a division within the company that handles only commercial mortgages so that business owners have someone who knows the market and its trends fully. Not only does this help the business owner feel more comfortable with the lender he chooses, but it also gives him confidence in the lender’s ability to service his mortgage and future needs. Unlike residential mortgages, commercial mortgages are frequently in various stages of refinance due to expansion, so it’s important for a commercial customer to have a loan officer that he can trust and rely upon for advice during these financial decision-making processes.