Commercial Loan Refinance

Refinancing a commercial loan is one of the best ways to improve business cash flow, and reduce the risk of a downturn to any business operation. Commercial loan refinances are often inexpensive, easily done, and quick for businesses that have current credit accounts, real estate which can be used as collateral, or a business owner willing to put their name on a commercial loan.

Commercial Loan Refinancing
Refinancing a commercial loan allows you to do several things, and there are as many variables in the choices available to you as there are possibilities for variables in your current loan. Most business owners refinance so as to reduce their monthly payments; however, we'll show you what you need to do a commercial loan refinance and what is typical for refinancing lenders.

Loan to value - A typical commercial loan refinance is offered at 70% loan to value, meaning that the business owner can borrow any amount against their commercial property equity up to 70%. Thus, if your business has paid off $100,000 of a commercial property worth $200,000, then you own 50% of the equity. The lender, being able to lend up to 70%, or $140,000 of the property's value, can then provide you with a refinancing loan of up to $140,000. You could then use the $100,000 to pay off the existing debt, and roll the $40,000 into your business as you see fit.

Lending terms - The lending terms and duration of the loan are equally important for business owners looking to refinance their property. Typically, a commercial loan is made with the understanding that the loan is to be paid off in 5, 10, or 15 years. Businesses which are profitable and have a long track record will find that a bank may be willing to lend for 25-30 years in the amortization schedule, but with a 10 year balloon loan.

A balloon loan is great because it allows you to have a low variable rate debt, which is only existent for 10 years. Through this 10 year loan, you pay on the debt as if it were a 25 or even 30 year commercial loan, and the bank expects that at the end of the 10 year loan term, you will refinance the property once more to make the balloon payment, or, if your business has proven very successful, simply pay off the balance due.

Lower Rates - Most borrowers choose to refinance their property to get a lower rate. In many cases, your business' financial condition may have changed since you last sought out a loan. In this case, you should absolutely consider refinancing, especially if things have improved. Your loan may now be less risky, or considered a prime candidate. Thus, always seek to refinance for lower rates when your business' financial condition has improved. In many cases, new or more equity in commercial property is reason enough to warrant lower borrowing costs.

Typical Refinancing Costs
In general, commercial loans are more costly than loans issued to consumers to buy live-in real estate. The simple fact of the real estate market is that the market is very much illiquid, and often difficult to navigate. Thus, banks take on additional risks when lending to businesses, and want to be compensated for such risks.

Expect to pay as much as a 1% origination fee for any loan for a commercial refinance. This fee covers the costs of the broker, the expense of time and consideration from a bank, and helps mitigate the need for higher interest rates.

There is one fee you should avoid if at all possible and that is the prepayment penalty, a charge assessed to accounts which are paid early. As you know, prepayment fees are the bank's way of locking in an interest profit should you decide to make the wise decision and reduce business debt. Don't pay a fee for making prepayments, as this fee will also be triggered should you decide to refinance. In most cases, a commercial loan refinance will come with higher prepayment penalties in the first few years of the loan, and gradually lowered fees toward the end of the loan. Additionally, watch out for an "early closure fee," which is a fee assessed on borrowers who move from lender to lender immediately after signing the loan. Typically, this fee can be 3-4% of the loan balance, and is usually charged on loans moved within the first 3 years following origination of a new loan.