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How Commercial Loans Work Business people borrow money mainly for many reasons, but normally the common reasons are money as working capital, money to expand an existing business or money as a leverage equity in a commercial real estate venture. One must have a different expectations when applying for a commercial loan in comparison to applying for a home mortgage loan. Since the operation varies depending on the lender’s terms, some lenders will go a step higher as to assess the applicant’s company worth, including the applicant’s commercial properties, as all these will serve as collateral for the loan, but most lenders charge a higher interest rate for commercial loans as compared to home loans. Before meeting the loan terms, an applicant must do research on the payment schemes of the different banks, since all bank loans require the borrower to pay the commercial loan much earlier than the due date for reasons that the banks include what is termed as a balloon repayment method, which is a procedure for a borrower, who for example applies for a 30-year loan, is required to pay the principal and interest, spread out for the next few years, maybe up to 10 years, and pay the entire balance in one balloon repayment. Following this form of payment arrangement, borrowers, who find it difficult to meet up this requirement, may be compelled to take the option of applying for a re-qualification of their loan or re-financing their loan at the end of the balloon term. The borrower has also to consider the risk factors before entering into this form of requirement, such as: experiencing a cash-flow problem in the years immediately preceding the balloon term, to which the lender may require a higher interest rate; the possibility of the borrower not to be granted for another loan; the borrower’s properties may be foreclosed for non-payment of the balloon repayment amount. A borrower might like to consider weighing down the commercial loan terms of non-bank lenders, who can be less stringent in their loan requirements and can offer long-term commercial loans without requiring for a balloon repayment, but their interest rates are way up higher than the bank’s rate.
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When the repayment options have been clearly analyzed by the borrower, the next step is to assess what would be the right amount to be loaned with respect to the borrower’s financial needs, as well as with respect to the bank’s loan terms. Once the borrower is able to get a full grasp of the terms, he/she has to consider the following: how much cash will the bank likely to grant and how much money should the borrower make available to repay the structured loan. Other bank loan requirements must be incorporated into a borrower’s evaluation process, and these requirements are: banks will require a down payment of 20-25% based on the amount of loan being applied; loan terms vary depending on the loan amount being applied, as well as the classification of the kind of business of the applicant; bank loans prohibit second mortgages.Getting Down To Basics with Loans