Key Commercial Loan Terms To Know When Applying For Business Financing

Very few business owners can survive opening their own business without taking out a single loan or accruing any business debt. In addition to small cash loans, commercial real estate loans are one of the financial solutions typically sought after by business owners looking to expand operations. Commercial loans are one of the best funding sources to finance business expansion. But before a business owner can go looking for commercial lending solutions to finance growth, they need to be able to decipher the commercial loan terms that they will be agreeing to. If you are a business owner, this is crucial to understand. Otherwise, you may wind up making a huge financial mistake that costs you your business. Avoid that by learning all about the commercial loan terms that will be included in your lending agreement in this post. That way, you can find a commercial lender that delivers the capital you need without sacrificing your business’s future financial stability.

Amortization Period

The commercial real estate loan amortization period is certainly something business owners should be concerned with when making financing decisions. Commercial real estate loans are not a standard amortized loan, like a mortgage. Instead, the amortization period could be much longer than the repayment terms for commercial loans. This means that you will make steady loan payments for the duration of the loan terms in an amount determined by the length of the amortization period. Then, at the end of the repayment period you will make a lump payment of the remaining outstanding debt. This lump repayment is done regardless of how long the amortization period is. But, it is important to remember that the longer the amortization period, the lower your monthly payments for your commercial loan. This is one of the must know commercial loan terms to help you make smart financial business decisions.

Loan Repayment

Loan terms has become a misnomer for a loan’s repayment period. The repayment terms for a commercial real estate loan are typically much shorter than traditional loan terms for consumers. Commercial real estate loan terms, that is to say the repayment period, usually lasts about 5 years. However, some commercial lenders offer commercial loans with repayment terms of up to 20 years. The longer your loan repayment terms duration, the longer you will have to pay back outstanding business debt. But, this will also increase the amount of interest owed on these borrowed funds for business, which could hurt your financial business plan. Be sure to pay close attention to the commercial loan terms repayment period information when you are applying for a business loan. This will enable you to make smart financial decisions for business success both now and in the future.

Debt Service Coverage

The debt service coverage ratio is another important commercial loan term used to determine a business owner’s ability to service outstanding debt. This is the ratio used to help lenders figure out the maximum loan amount they feel comfortable offering a business owner. Of course, this is something you should know when you go to apply for commercial real estate loans. It will be one of the deciding factors as to how much funding you will be able to secure for your expansion. The debt service coverage ratio, or DSCR, compares the NOI of a property to the annual mortgage debt service. This ratio gives insight into potential cash flow generation for a property, which is then used to determine your lending eligibility. You may want to figure this ratio out for yourself to estimate the business funding you can reliably expect to get approved for.

Interest Rate

The commercial loan interest rate is the single most important loan term to closely observe. When applying for a commercial real estate loan, or other bad credit loans, you want to apply for the loans with the lowest interest rates. The lower the interest rate, the less money you will wind up paying for your outstanding business debt in the long term. The less money you spend repaying outstanding business debt, the more money you can re-invest back into business. Pay close attention to the commercial real estate loan interest rates offered by lenders you are considering. That way, you can be sure to apply for a commercial loan that will be best for your business’s financial performance.

Prepayment Penalties & Lockouts

Prepayment penalties and lockouts are also commercial loan terms that should be of concern to business owners applying for funding. A prepayment penalty is a fine charged when you pay off your loan too early. Prepayment penalties can be charged by commercial lenders to act as a deterrent to business owners paying off outstanding business debts early, therefore limiting their interest payments. Some lenders include these prepayment fines in their loan terms. Other commercial lenders have a lockout term instead. This lockout term defines a certain length of time during which a borrower cannot pay off the loan early. After that lockout term period is up, the loan can be paid off early without consequence. These are two commercial loan terms that are vital to the decision making process for business owners. Look into these commercial real estate loan terms before you sign for a loan with a particular business lender.

All business owners seek business funding from loans and other alternative financing sources at one point or another in their time in business. Finding business loans is easy, but choosing the best commercial loans for a business’s future financial stability and performance is a bit more difficult. You need to understand commercial loan terms before you start applying for commercial real estate loans. That way, you can make sound financial decisions for business. Familiarize yourself with the important business loan terms detailed above. These terms are some of the most important considerations when choosing the best business loans to cover expansion costs. Be sure to pay close attention to these details before signing a loan agreement for business.

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