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Know Your Commercial Loan Brokers

Brokers play a very significant role in the deals that involve money. It is actually tough to grab an inexpensive deal in the competitive market. The people roam here and there in search of a perfect broker who can bring in lucrative and affordable deals. When it comes to commercial or residential loans, you may face some technical problems. There would be some legal or financial facets in the bond paper, which may puzzle you. Here, it is only commercial loan broker who makes everything understandable and readable as well. The brokers come with their long experience and expertise to bargain with the loan provider in a professional way. They try to ease the terms and conditions as possible as they can. So, it is imperative to know your loan brokers in terms of their skill and experience. Let’s consume some piece of information about the brokers so that we can reach the best one in the market.

Identify the dealer -
You should first identify your dealer. In the market, the brokers are coming with a specific field to deal in. as the diversity of loan extends to the unlimited horizon, the brokers have limited themselves to a particular field in order to polish their job with perfection. You should go with the commercial loan brokers who have expertise in this area. They would bring in affordable and lucrative deals before you.

Examine the credentials and certification -
Before assigning the job, you should go through all the points that elaborate the credentials and authorization entitled by the state authority. You should not overlook such important facets. If the broker lags behind in terms of authorization, you may face some legal complications in course of deals.

Do avoid the rocket-firing agents -
You should avoid those agents who make tall promises to provide highly profitable loans. As the advance depends on the market trend, a rocket-firing agent can never satisfy the tall promises. Such commercial loan brokers pose great harm for the customers.

Apart from the points, mentioned above, you should also do some homework at your end. You can compare the deal with other one in order to fetch cheaper and more inexpensive loan. What is more, you should contact with the loan provider personally for unearthing some more information regarding interest rate and the loan tenure. It is vital to satisfy maximum queries by oneself

How Asset-Based Loans From Commercial Finance Companies Differ From Traditional Bank Loans

When it comes to the different types of business loans available in the marketplace, owners and entrepreneurs can be forgiven if they sometimes get a little confused. Borrowing money for your company isn’t as simple as just walking into a bank and saying you need a small business loan.

What will be the purpose of the loan? How and when will the loan be repaid? And what kind of collateral can be pledged to support the loan? These are just a few of the questions that lenders will ask in order to determine the potential creditworthiness of a business and the best type of loan for its situation.

Different types of business financing are offered by different lenders and structured to meet different financing needs. Understanding the main types of business loans will go a long way toward helping you decide the best place you should start your search for financing.

Banks vs. Asset-Based Lenders

A bank is usually the first place business owners go when they need to borrow money. After all, that’s mainly what banks do – loan money and provide other financial products and services like checking and savings accounts and merchant and treasury management services.

But not all businesses will qualify for a bank loan or line of credit. In particular, banks are hesitant to lend to new start-up companies that don’t have a history of profitability, to companies that are experiencing rapid growth, and to companies that may have experienced a loss in the recent past. Where can businesses like these turn to get the financing they need? There are several options, including borrowing money from family members and friends, selling equity to venture capitalists, obtaining mezzanine financing, or obtaining an asset-based loan.

Borrowing from family and friends is usually fraught with potential problems and complications, and has the potential to significantly damage close friendships and relationships. And the raising of venture capital or mezzanine financing can be time-consuming and expensive. Also, both of these options involve giving up equity in your company and perhaps even a controlling interest. Sometimes this equity can be substantial, which can end up being very costly in the long run.

Asset-based lending (or ABL), however, is often an attractive financing alternative for companies that don’t qualify for a traditional bank loan or line of credit. To understand why, you need to understand the main differences between bank loans and ABL – their different structures and the different ways banks and asset-based lenders look at business lending.

Cash Flow vs. Balance Sheet Lending

Banks lend money based on cash flow, looking primarily at a business’ income statement to determine if it can generate sufficient cash flow in the future to service the debt. In this way, banks lend primarily based on what a business has done financially in the past, using this to gauge what it can realistically be expected to do in the future. It’s what we call “looking in the rearview mirror.”

In contrast, commercial finance asset-based lenders look at a business’ balance sheet and assets – primarily, its accounts receivable and inventory. They lend money based on the liquidity of the inventory and quality of the receivables, carefully evaluating the profile of the company’s debtors and their respective concentration levels. ABL lenders will also look to the future to see what the potential impact is to accounts receivable from projected sales. We call this “looking out the windshield.”

An example helps illustrate the difference: Suppose ABC Company has just landed a $12 million contract that will pay out in equal installments over the next year, resulting in $1 million of revenue per month. It will take 12 months for the full contract amount to show up on the company’s income statement and for a bank to recognize it as cash flow available to service debt. However, an asset-based lender would view this as receivables sitting on the balance sheet and consider lending against them, depending on the creditworthiness of the debtor company.

In this scenario, a bank might lend on the margin generated from the contract. At a 10 percent margin, for example, a bank lending at 3x margin might loan the business $300,000. Because it looks at the trailing cash flow stream, an asset-based lender could potentially loan the business much more money – perhaps up to 80 percent of the receivables, or $800,000.

The other main difference between bank loans and ABL is how banks and commercial finance asset-based lenders view the business’ assets. Banks usually only lend to businesses that can pledge hard assets as collateral – mainly real estate and equipment – hence, banks are sometimes referred to as “dirt lenders.” They prefer these assets because they are easier to control, monitor and identify. Commercial finance asset-based lenders, on the other hand, specialize in lending against assets with high velocity like inventory and accounts receivable. They are able to do so because they have the systems, knowledge, credit appetite and controls in place to monitor these assets.

Buying Apartment Buildings

Apartment buildings usually have a myriad of commercial lenders amenable to financing this property offering various loan products. It arguably could be considered the “bread and butter” of the commercial industry in which most individuals who aspire to enter the commercial real estate arena, attack. It has elements of single family and small multifamily tenancy scaled to a larger degree with other elements differentiated from residential property. Regardless, as real estate, apartment buildings have the elements inherent in realty which quantifies its desirability as an investment vehicle. What it shares with the other real estate property types and realty as a whole is:-

Some of the Pros and Cons of Real Estate:-

Pros

a) Potential high yields – investments inherently have the potential for high yields depending on the utilization of the property to maximize its potential, the deal structure implemented, strategies used to add value to project, exit strategies, etc. These can effectively extract a rate of return which compensates for the risk applicable to this form of investment.

b) Leverage – the acquisition of real property and its subsequent refinancing or disposition benefits from the assets class capacity to be leveraged. This increases the rate of return which can be captured from respective projects, decreases the amount of the investor’ s capital tied up in a deal and the extraction of capital from one property through refinancing or resale to facilitate the pyramiding of equity into larger properties, diversification into other real estate categories, other investments, etc.

c) Income Tax Flexibility – real property continues to offer tax write-offs which can reduce the taxable income of investors and investment entities. These are inclusive of the deduction of applicable operational expenses, depreciation, tax credits for projects meeting certain criteria, tax reductions, etc. This can create a scenario where there is paper negative cash flow while the project is operating profitably.

d) High Degree of Personal Control – the ownership of realty can be active or passive. Active ownership of real property affords direct operation or management of the investment and being in a prime position to maintain or add value to the project. This degree of control is reassuring for some people and the tangible aspect of real estate fulfills a security component desired by others.

Cons

Illiquidity – the realty market is imperfect which does not create a readily viable mechanism to sell real estate in comparison to other investments, e.g. stocks, bonds, etc. This generally delegates it to a longer term investment without the ability to dispose of it in response to fluctuations in the market.

a) Large Capital Requirements – the capital required to acquire and maintain real estate is substantial. This is relative, but added to the illiquidity of the investment creates a level of associative risk that deter some individuals from entering the real property investment market. The capital allocated for buying real estate usually represent a large capital commitment for many buyers coupled with the uncertainty of the demise of the project.

b) Constant Management – in order to maintain value, add value, maintain habitability, satisfy tenants, etc it is necessary to constantly manage investment realty. This helps to preserve and protect the investment and it can be a requirement of lending institutions that have loaned funds to the owners, compliance with building codes, OSHA requirements, etc.

c) Risk – investing in real property have substantial risks which can be exasperated with the duration of ownership, specific real estate project, micro and macroeconomic variables, etc. Different investors have various risk quotients which determine their comfort level with real estate projects in various monetary, economic, regulatory, competitive, etc environments.

Various investors will be affected differently by these variables in terms of the profitability they are able to extract from specific properties, the overall success of their CRE portfolio, their capital risk tolerance, etc. However, being aware of some of the potential upside and downside inherent in investing in real estate enhances your capacity to capture the upside and mitigate the downside maximizing the return on your investment capital.