Most business owners are familiar with the most well-known ways to finance the acquisition of commercial, investment, or multi-family properties. Today, conventional bank loans are very competitively priced, and SBA loans can allow for higher loan-to-values (LTV ratios) than conventional lending…if you qualify for them.
The major reasons why conventional or SBA lending are not possible (or not desirable) for a number of buyers are typically the following:
- Issues with Personal Credit. Well beyond insufficient credit scores (i.e. below 680), many lenders will reject borrowers with any issues in the last 12 months (sometimes even just one late payment) or any longer-term problems (such as bankruptcies or short sales).
- Negative business Net Income or insufficient profitability on the most recently filed tax return.Businesses have ups and downs, and even companies with multiple years of profitability can have a negative year for any number of reasons (such as losing a customer, extraordinary or one-time expenses, or investing now for next year’s growth). And let’s be honest: many business owners/entrepreneurs seek to minimize their tax liability and therefore show lower net income, or also run some or a lot of personal expenses through their business.
- Foreign National. Very few banks lend to or allow deposits from foreign nationals, and SBA lending requires U.S. citizenship or a green card. This fact alone disqualifies a huge number of potential buyers, particularly in South Florida.
- Documentation. Bank and SBA lending require a large amount of documentation, including three years of business and personal tax returns, and recent interim financial statements. Sometimes, the preparation of these documents requires too much time and money, and they often can have even one issue, current or historical, that would result in being declined.
- Time. Bank and SBA loans can often take 60-90 days or more to close; alternative products often close within 30 days.
- Restrictions or Restrictive Covenants. As examples, SBA lending and most banks do not allow for cash-out refinancing, and also have future yearly profitability (debt service coverage) requirements that may restrict a businesses’ strategic or operating freedom going forward.
So where do you go if any of the above apply to you?
Alternative financing products, which focus on property value, not on business or personal income, overcome these issues. And these are not traditional hard-money loans that are often priced at 12% and higher with only 50-60% LTV. As an example, here are the general guidelines for a well-priced alternative product:
- Purpose: Purchase or Refinance (including cash-out)
- Types of Properties: Investor 1-4, Multi-Family/Mixed Use, and Commercial
- Loan Amount: starting at $75,000
- Term: 30 years, with fixed rates for the first 3 or 8 years
- Loan-To Value: 70-75%, depending upon the type of property
- Credit Score: a minimum of 650
- Interest Rates: 8.24% to 9.99%, depending upon fixed term, property type, and credit score range
- Business profitability or sufficient personal income: not required
- Available to foreign nationals? Yes
- Time to close: Typically within 30 days
- Covenants: None
If you’re interested in this type of financing, or if you believe it will be a good fit for your needs or circumstances, be sure to explore them further. They are often called “non-conforming” loans or “alternative” loans across the finance community, since they are not originated by a bank.
For any business owner considering the purchase or refinancing of commercial or investment property, it’s important to keep abreast of all the potential financing options available in today’s marketplace.