If this is your first time applying for a commercial loan, it is important to know that the New York commercial real estate lending procedure greatly differs from the home mortgage application process.
A major reason for the differences in the application process is the fact that commercial loans are not backed by any government entities. This results in commercial lenders being risk-averse, and charging higher interest rates.
When you apply for a commercial loan, the lender will probably scrutinize your business and the commercial property you intend to use as collateral. You should be prepared for this to happen and treat the application process differently than you would if applying for a secured loan on your home.
What You Should Consider
- Repayment – New York commercial real estate lending terms are different than those for residential mortgages. Banks will typically require you to repay the loan in full before the actual due date. This is achieved by including a balloon repayment policy in the contract. The loan is financed on a 30 year term, just like a house would be. However, after a set term of years, somewhere between 3 and 10, the balloon repayment requires that you pay the loan in full. If you cannot repay the loan in full, you have to either re-qualify or refinance. This can be extremely difficult for businesses that haven’t saved enough money or are experiencing cash-flow problems.
- Borrowing Amount – Prior to seeking funding, you should evaluate how much money you will need for the project, as well as your ability to repay it. Most lenders do not allow second mortgages, so it is important that you borrow enough to cover all costs. You also have to take the down payment into account. If you are purchasing a new property, many banks will require a down payment of twenty to twenty-five percent.
- Approval – The bank will require income statements, balance sheets and proof of cash flow, as well as tax returns dating back up to five years. Unfortunately, getting approved can be a long drawn out process and take several weeks.
Being prepared for the New York commercial real estate lending process can save you time and help you avoid any surprises, just do not forget that private lenders and the hard money loans they offer could make a much more convenient alternative.