the bigger-ticket loans, your options will be quite a bit
more limited if your credit isn't the best. This article will
clearly explain what your options realistically are, and how
to choose the best course of action based on your current
you're a commercial borrower with poor credit when it comes
to getting a commercial loan you're choices are going to be
limited. At the best of times commercial lending poses many
challenges but coupled with poor credit, the difficulty level
multiplies considerably and the options diminish rapidly.
In this sort of scenario you will more than likely have to
get a hard money commercial loan through commercial hard money
are individuals that borrowers turn to when conventional sources
(banks, credit unions, trust companies) are not available
for the borrower.
hard money or private money lenders are the answer for borrowers
with unusual situations and more often than not tight timing
restraints. Due to the nature of the risk for these
lenders, it's an expensive option for borrowers and is meant
only to be a short term solution; to help the borrower resolve
immediate and short term issues.
the lenders point of view it's meant to bridge a financial
gap while the borrower restructures debt and or
sells the underlying asset in order to remedy his or her situation
in mind that these types of commercial loans are expensive. Payments
are almost always interest only, and the rate itself typically
ranges from 11%- 15%. Points can range from between
2% - 6%. Terms can be as short 6 months and in some
cases I've seen them as long as 36 months, but the average
is about 12 months.
amounts can range $50,000 - $10,000,000 and the loans are
for both commercial real estate investors and business owner/users.
Situations that likely require hard money commercial loans:
Low personal credit scores of borrower(s).
Lack of liquidity for either the borrower and/or borrowing
Short time constraints - Needing to close within 10
days, for example.
Cash flow on investment property not stabilized or
too low to cover proposed debt and expenses ratios for a conventional
Cash flow on business (for owner occupied transaction)
to low to meet proposed debt and expense ratios for mainstream
Subject property in foreclosure.
Partnership break up where one partner needs to buy
Construction delays or issues due to cash shortfall
Plus many more
keys to the underwriting process of commercial loans for clients
with poor credit are:
to Value on the proposed loan will not typically exceed
60% of the value of the underlying asset. In other words
if your property is worth $1,000,000 the maximum loan amount
you could hope to get is $600,000. Now as mentioned
you may find some lender who may be willing to go higher but
this would be the exception not the rule and at best you would
be hard pressed to find any who would go beyond 65%.
reason for this is that the lender is mitigating their risk
by the amount of equity they leave unencumbered. The lender
knows that if you have a substantial amount of equity in the
property, you're far less likely to default on payments because
you wouldn't want to do anything to jeopardize that equity.
Debt Service. Bottom line, is the borrower going
to be able to make the monthly payments? In the case of an
investment property, the lender is going to want to satisfy
himself or herself that the net income will be sufficient
to cover the proposed loan. In some cases the lender
may structure the monthly payments as part of the overall
loan provided there is sufficient equity to do so. If the
borrower is relying upon income from another business or property
to cover the payments the lender is going to want sufficient
proof of this. As credit criteria in general tightens and
commercial foreclosures begin to rise this is becoming more
and more of an issue.
Exit Strategy. In other words, what is the plan
for repaying the lender back in full? Is the purpose
of the funds to be able to fix up the subject property than
sell it? Or do you have another transaction that youre
waiting on to complete from which you will use the profits
to pay off this loan. Or your purpose may be to stabilize
the properties cash flow than turnaround and refinance with
a conventional loan? If you want the funds, make sure
you have to have a rock solid plan on repaying it back. Making
sure you can answer this question should be even more important
to you than the lender, because if you can't honestly see
a clear way of getting out of the loan, don't do it as the
carrying cost will wipe you out in the long run.
Final Word: If you're faced with a difficult situation
in the short term and are in need of a commercial loan, private
money commercial lenders are an expensive, but viable
option so long as they remain a short term solution and don't
become a long term one!