Lending Practices

Commercial lenders include commercial banks, mutual companies, private lending institutions, the hard money lenders (factoring), and other financial groups. These lenders typically have widely varying standards and/or practices on which they base their loan criteria and evaluate potential borrowers.

Commercial lenders specialize in hard money and bridge loans, often those that close quickly, in as little as two weeks. The commercial loan industry is most often accessed through agents or brokers. Brokers and/or sales agents provide an evaluation of a borrower and then recommend the loan to a number of different commercial lenders for whom they feel will be most likely to fund the borrower’s request.

The real king pins of the industry controlling the flow are the processors. Going through a broker or agent rather than directly through a lender may cause longer wait times for loan financing and the risk of more up-front fees; However, brokers or agents can greatly facilitate the lending process. Often these individuals come up with innovative and unique ways to overcome obstacles that the borrower may not be able to figure out on their own.

Commercial lenders weigh the type, quality, and equity of the hard collateral very heavily. Which will provide the borrower with the greatest flexibility, but at the same time bring the highest rates when compared with traditional bank loans.

Many commercial loans are bridge loans where a higher rate is a good trade off for the speed with which the loan is delivered and the flexibility of the finance terms behind it; however, most commercial loans never come to be since the average business owner wanting a first time loan can easily get a second on their personal assets.

Thanks to freedom from regulation, the commercial lending industry operates with particular speed and responsiveness, making it an attractive option for commercial businesses seeking quick funding; However, the speed and efficiency has also created a highly predatory lending environment where many companies refer loans to one another (brokering), increasing the price and loan points with each referral.

There is also large concern about the practices of some lending companies in the industry who require upfront payments to initiate loans and refuse to lend on virtually all properties while keeping this fee. Borrowers are advised not to work with hard money lenders who require ANY upfront fees prior to funding in order to reduce the risk. Anyone asking for money from you in order to lend to you is 10 times out of 10 a scam.

In recent years there have been some significant changes in commercial lending. A good example is with the credit unions. Credit Unions are now allowed to engage in commercial lending with only minor restrictions. Credit unions are prohibited in most cases from lending more than 80% of the value of real property. Due to the need to protect credit union members from excessive risk. Which is a common practice in the industry as a whole, although not enforced. On the other hand, credit unions are cooperatives and can therefore offer competitive advantages over other institutions in regards to rate and other terms.

Progressive commercial lenders prefer to offer terms for shorter periods of time than traditional residential lenders which lend at fifteen to thirty year terms. Commercial lenders sometimes offer a five or ten year loan with a payout based on longer, thereby leaving a balloon payment due at the loan expiration. Which often requires the property owner to come up with the balloon payment himself, or to refinance or sell.

Additionally a commercial lender might attempt to charge a prepayment penalty in order to guarantee a certain return (some states this in not enforceable as is the case in most states), in the event the loan is not kept for the full term. Frequently prepayment penalties range between one and five years. Penalties are for an amount of interest or number of months such as the frequently will be seen in a six month interest guarantee or there is a early payoff.

If you have questions about lending practices the National Lending Center encourages you to contact your local governing agencies or banking commissioners office.