What is Commercial Lending?
Commercial lending is a process that enables a business entity to activate and subsequently obtain a finance stream, to help companies fund short-term expenditures or pay for capital equipment. In most instances, commercial lending is made through the delivery of loans that are backed by hard collateral. Hard collateral, as it pertains to commercial lending, typically includes real estate or non-conforming assets.
Common Practices Associated with Commercial Lending:
Commercial lending is initiated and administrated by financial institutions including the majority of commercial banks, private lending companies, mutual companies, hard money lenders and other forms of financial groups. These types of financial institutions possess varying qualifications and standards in regards to who may qualify for a commercial loan.
The standards regulated by these forms of lending institutions will evaluate potential buyers and base their loan criteria on the company’s ability to make money and the attached credit report of the applicant. That being said, commercial lending is not primarily focused on the private market; the obligations latent in commercial lending is viewed as more lenient when compared to the financial qualifications instituted by banks.
Commercial Lending Brokers:
Financial institutions that practice commercial lending will specialize in bridge loans and hard money streams of financing. These forms of loans close quickly (in as little as two weeks) and are most often accessed through brokerage firms, who will provide an evaluation of a prospective borrower. The process of going through a broker (rather than directly through a lender) may perpetuate increased delays in regards to accessing financing. Additionally, this form of funding will incur more up-front fees and higher commercial loan rates. The advantages of a broker are found in the ability to facilitate the process and to deliver an innovative way to overcome obstacles that would otherwise impede the borrower from accessing funds.
Commercial Lending Industry:
The commercial lending industry is not constrained by the stringent barriers present in the private lending marketplace; as a result of this relative laxness, the commercial lending industry operates with responsiveness and a particular speed, making commercial loans attractive for quick sources of funding. These characteristics; however, also create a predatory lending environment where many companies will refer loans through brokering, which will increase the price and loan rates with each referral.
Commercial Lending Loan Terms:
The majority of financial institutions who participate in financial lending will prefer to offer their financing for shorter periods of time, especially when compared to a residential lender. Commercial lenders, at most, will offer a five or ten year loan with a payment schedule reminiscent of a balloon maturity. Furthermore, a commercial lender might also charge a “pre-payment penalty” in order to guarantee a fixed return. The pre-payment penalty will typically exist in the event that the loan is not kept for the full term. Frequently, these penalties aligned with commercial lending will range between one and five years and are for interest-based for a designated number of months.