Commercial Mortgage Loan Basics For Small Business Owners

It is appropriate for business owners to "get back to basics" before finalizing new commercial loans because the issues currently impacting commercial mortgages are so widespread and effecting business borrowers everywhere. The need to not only focus on the "old basics" but also on a series of "new basics" created by the massive shift in business loan services might be the most challenging aspect for commercial borrowers reacquainting themselves with the "basics" for commercial mortgage loans. The current business banking climate for commercial real estate loans provides an ideal illustration of many surprising changes and ongoing difficulties for small business financing.

The outcome that effective commercial real estate financing is becoming harder to find is the biggest net result of the changes and challenges involving commercial mortgages. This observation applies equally to new commercial loans for buying a business and commercial refinancing efforts. To make this challenge almost insurmountable, very few commercial lenders are providing a candid assessment of their inability to provide commercial mortgage financing for a wide variety of small businesses.

The need for small business owners to be prepared for an extremely difficult commercial lending environment is an intentional emphasis in this discussion. Obtaining commercial mortgages can no longer be taken for granted by small businesses because of the recent ineffectiveness that prevails with commercial banking. Large corporations continue to have more leverage and resources for dealing with their banks. In a mirror image of that situation, small business borrowers are increasingly likely to have less resources and leverage when negotiating with any bank.

Fewer banks providing this kind of financing to small businesses is one inescapable "new basic" for commercial real estate loans. It will frequently be even more difficult to secure a commercial mortgage from a new and unfamiliar lender if the current bank for a business is not willing to help. Nevertheless that is a likely funding scenario that currently confronts business borrowers everywhere. As noted above, a particularly annoying (and growing) trend is that banks are not generally being straightforward in telling prospective commercial borrowers that they have reduced their commercial loan activities. A large number of banks received government bailouts that helped to keep them operating, and now these banks are more intertwined than ever with political influences. Although banks were expected to return to a "normal" level of lending once they received bailout funding, very few have actually followed through on this promise.

Another "new basic" that seems likely to prevail is a reduced amount of leverage for most small business loans. This will mean that borrowers will need larger down payments to buy a business. Commercial debt refinancing will be more difficult because of the reduced leverage, especially when combined with decreasing commercial real estate values currently being experienced on a widespread basis.

We previously published a companion piece describing the need to get back to basics with working capital financing. In terms of the growing challenges with commercial refinancing, the points made in that article are directly relevant to this discussion. Even though a small business owner might feel that they can obtain needed cash by refinancing an existing commercial mortgage loan in which they have substantial equity, our primary point is that any current effort to refinance a business loan is likely to be much more difficult than expected. If that proves to be the case, commercial borrowers should consider a working capital loan as a "Plan B" solution when commercial real estate refinancing cannot be obtained.