Pandemic or not, businesses want to stay in business. Investors want to jump on rare investment opportunities — but how do they do that when the banks shut them out? The answer: they turn to private lenders.
But why are people so hesitant when it comes to private lenders?
Sure, banks have been around for a long time and have traditionally been seen as trustworthy, while private lenders may be seen as rogue lenders who make their own rules — but that isn’t necessarily a bad thing.
Private lenders aren’t loan sharks that are after your assets. They are established, reliable lenders that are looking to step up when the banks cannot… and these are especially such times. Dave Dambro, branch owner of Commercial Capital Ltd., FL, says, “The truth is, lenders don’t want your real estate. They don’t want your collateral. They’re in the business of giving money to get this much back in return. It’s that simple.”
Therefore, if you’re a borrower who is facing credit or cash flow challenges due to the effects of COVID-19 — but you have a strong business or commercial real estate asset to leverage for a loan — you still have several real options available when it comes to commercial financing — and they’re not available at your corner bank.
These commercial loan options, all from private lenders, include Hard Money, Bridge, and SBA loans.
Hard Money
A Hard Money loan is a type of mortgage that is secured by real property, and is typically from private money lenders rather than banks. Hard money loans are non-recourse, and thus the borrower is not held personally liable in case of a default. This means that in the case of a default, the lender would only go after the collateral asset – which is, in our example, the commercial real estate – rather than going after the borrower’s personal assets.
Hard Money loans are COVID-proof for this simple reason: buildings DON’T GET SICK! Since these are short-term loans (typically less than 24 months) they operate on the expectation that the property won’t decrease in value significantly enough during the brief loan period. And also, while certain properties may become slightly less attractive (ie. office buildings, hotels, retail strips), the loan only lends at 50-70% LTV. Thus, the emergency sale of the collateral will still usually cover the loan in the case of a default.
Besides being non-recourse, there are some other COVID-friendly benefits to these loans: since they’re concerned with the collateral, they require less documentation from the borrower. This is especially beneficial for the borrower who has credit challenges or can’t qualify for a conventional loan through a bank. Can’t find an appraiser? This is not necessarily a problem! Sometimes, lenders themselves will determine the collateral’s market value — without an appraiser — if there is sufficient evidence of the property’s value.
Bridge Loans
As with a Hard Money loan, a Bridge Loan is a loan made of temporary funds that are based on the value of the real estate collateral’s value, with some emphasis based on the borrower’s creditworthiness. Also known as gap financing, interim financing, or swing loans, Bridge Loans “bridge” the gap during times when financing is needed but not yet available.
Both corporations and investors may use bridge loans, which can be customized by the lender for many different requirements. These requirements may include making improvements, renovations or repairs to CRE prior to securing a permanent loan, or obtaining financing prior to stabilizing a property and qualifying for better rates and terms.
Bridge loans are usually short-term averaging 12-24 months. Generally an interest-only monthly payment rather than an amortizing payment is required to service the debt at slightly higher interest rates than a permanent mortgage. (However, since the monthly payment is interest-only, the cost to service the debt may not be that much higher than a typical P&I monthly payment.) Bridge loans are backed by some form of collateral (primarily CRE), but may include business assets.
By using a bridge loan, borrowers may use the equity in their current commercial real estate as the down payment on the purchase of another investment property until securing a permanent financing solution.
Why are Bridge Loans COVID-proof? Similar to Hard Money loans, Bridge Loans are COVID-proof because they are short term and rely on collateral, which “doesn’t get sick.” However, Bridge Loan requirements include providing a statement with an exit strategy back to permanent funding. For example, “If you give me this money for 12-18 months, here’s how I will refinance back to permanent…” This exit strategy acts as a safety feature, reducing the risk of exposure for the lender. This is why, with an exit strategy, you can reap the benefits of a higher LTV and better rates on a Bridge Loan.
SBA Loans
SBA Loans help stable small businesses grow and expand. By meeting certain criteria, the Small Business Administration guarantees a portion of your loan, which lowers the loan’s risk – getting you the best commercial loan rates and terms available.
Due to the effects of the pandemic on the economy, it’s become harder for lenders to find stable businesses to fund — so the rates are lower than ever. However, if your business has survived the challenge, an SBA loan might give your business a unique and rare opportunity to grow, acquire, and expand. Use an SBA loan to finance new equipment for your medical office, or purchase another fulfillment warehouse for your growing e-commerce business. An SBA loan has so many uses!
Why are these loans COVID-Proof? SBA Loans are COVID-proof because the SBA’s role is to promote the strength of small businesses to support and grow the economy and job market, as well as provide relief such as EIDL’s for natural disasters and such. This means that it will always be in the government’s best interest to save small businesses in the case of a natural disaster, such as the COVID-19 pandemic. That is why, thanks to the CARES Act, Congress has allocated another round of additional funds for SBA guarantees — providing rare and excellent financing opportunities — in order to keep the economy moving forward. (For more information on the current SBA incentives, read our recent article here.)
In conclusion…
Pandemic aside, there is plenty of commercial money available. If your business or investment makes sense financially, then the next step is simply finding the right commercial loan specialist to nail down the right loan for your requirements. The professionals at Commercial Capital Ltd., FL (a direct private and bridge money lender) can assist you with their own funds, and additionally advise you on the entire picture of your loan options, including SBA, CMBS, and conventional options. If you or your business is looking for commercial financing and want to find the best options available, call us today at (888) 959-1648 or email us at info@comcapfl.com.