Business Owners, Beware When Shopping For A Commercial Mortgage
Entrepreneurs that have been through the process of purchasing a commercial property for their business, understand the complexity of the process. Securing financing is just one part of the equation - which in and of itself is cumbersome and borrowers literally have 100's of loan option to choose from.
A very common mistake we see is that entrepreneurs assume they will get the best deal from their existing bank. It's a logical assumption. After all, the business has their checking/savings account, perhaps they have other services such as their 401 k etc tied in with their bank. And they have personal relationships with the people and assume this will help them get a break/edge. The reality is that traditional banks have the most conservative underwriting standards and offer some of the shortest fixed periods and amortization schedules in the market.
To often the business owner simply does not shop and get lured into a short term loan that either adjusts, from once a quarter to once every 5 years or full on balloons. This puts the business owner in a very vulnerable position as rates/terms could be much worse when the loan adjusts or balloons.
Another issue of having your commercial mortgage held by your bank that has your deposits is a nasty little provision called the "right to offset". This means that the bank has the right to enter your checking/savings account (business or personal) and remove cash to "offset" the balance that's owed on the mortgage. Banks only exercise this right in times of distress/default but it is dangerous for the borrower and often comes when the business owner has the biggest need for cash - in bad times.
There are many more options out there than most entrepreneurs realize. For example, there's a little known 30 year fixed commercial loan that has rates and fees right in line with bank financing, but the loan is fixed for 30 years. The borrower can enjoy piece of mind knowing they never have to worry about refinancing or having their rate adjust in the future.
In addition, because of the long amortization period the cash flow savings can be substantial - often 15% - 25% less than a typically 5 year fixed 20 year amortization bank loan.
Business owners may consider working with an experienced broker that is in touch with innovative commercial mortgage programs that are not offered by banks. A broker normally works with several different lenders, each of which has multiple programs. So, by working with a broker the borrower is exposed to many different options, and only has to deal with one source. Essentially the broker's market knowledge can quickly and efficiently point out all relevant options that fit the business owner's situation.
A common misperception is that brokers will add a substantial cost onto the loan, which is simply not the case. A good broker will create a competitive situation between banks/lenders and should save the borrower money, not just tack on an additional origination fee. Likewise, most brokers now get paid directly from the lender on deals from $200,000 - $5,000,000, so the entrepreneur doesn't have to worry about that.
Regardless, if the borrower wants to shop on their own or work with a broker it is in the best interests of the entrepreneur to get out there and explore options. Don't simply assume that your existing bank has your best interest at heart, because they don't.
A very common mistake we see is that entrepreneurs assume they will get the best deal from their existing bank. It's a logical assumption. After all, the business has their checking/savings account, perhaps they have other services such as their 401 k etc tied in with their bank. And they have personal relationships with the people and assume this will help them get a break/edge. The reality is that traditional banks have the most conservative underwriting standards and offer some of the shortest fixed periods and amortization schedules in the market.
To often the business owner simply does not shop and get lured into a short term loan that either adjusts, from once a quarter to once every 5 years or full on balloons. This puts the business owner in a very vulnerable position as rates/terms could be much worse when the loan adjusts or balloons.
Another issue of having your commercial mortgage held by your bank that has your deposits is a nasty little provision called the "right to offset". This means that the bank has the right to enter your checking/savings account (business or personal) and remove cash to "offset" the balance that's owed on the mortgage. Banks only exercise this right in times of distress/default but it is dangerous for the borrower and often comes when the business owner has the biggest need for cash - in bad times.
There are many more options out there than most entrepreneurs realize. For example, there's a little known 30 year fixed commercial loan that has rates and fees right in line with bank financing, but the loan is fixed for 30 years. The borrower can enjoy piece of mind knowing they never have to worry about refinancing or having their rate adjust in the future.
In addition, because of the long amortization period the cash flow savings can be substantial - often 15% - 25% less than a typically 5 year fixed 20 year amortization bank loan.
Business owners may consider working with an experienced broker that is in touch with innovative commercial mortgage programs that are not offered by banks. A broker normally works with several different lenders, each of which has multiple programs. So, by working with a broker the borrower is exposed to many different options, and only has to deal with one source. Essentially the broker's market knowledge can quickly and efficiently point out all relevant options that fit the business owner's situation.
A common misperception is that brokers will add a substantial cost onto the loan, which is simply not the case. A good broker will create a competitive situation between banks/lenders and should save the borrower money, not just tack on an additional origination fee. Likewise, most brokers now get paid directly from the lender on deals from $200,000 - $5,000,000, so the entrepreneur doesn't have to worry about that.
Regardless, if the borrower wants to shop on their own or work with a broker it is in the best interests of the entrepreneur to get out there and explore options. Don't simply assume that your existing bank has your best interest at heart, because they don't.
