Commercial Real Estate Financing: Bank Loans vs. Alternative Loans

When it comes to commercial real estate financing, there are several choices available. The most traditional option is getting a loan from a bank. Investors may also want to look into alternative loans from other sources, such as Synergistic Funding. The first step in obtaining financing, however, is some basic research on what is available. One challenge in any commercial real estate transaction is risk. Will this investment triple in value in the next 5 years, or is there another real estate bubble about to burst? This uncertainty can make it difficult to get a loan at a satisfactory interest rate because banks and other lenders may be wary. From uncertain markets, risky investments, and increasing regulation, there are many reasons to be cautious. Banks offer certain advantages for commercial real estate financing. They can frequently offer the lowest mortgage rates on the market. With traditional loan qualification guidelines, their procedures may lower a borrower’s risk of default. They also offer long-term options, which spread the risk out over twenty years or more. On the flipside, there are some aspects to bank loans that cause some borrowers to look elsewhere. Loan packages typically have a rigid down payment structure with strict income verification and credit score requirements. The approval process can be long and drawn out, lasting as long as three months before the financing is secured. Banks rarely lend on non-conforming product types. They also levy high pre-payment fees, making it difficult for borrowers to get out of paying the full value of the loan if they want to sell the property. Funding through alternative lenders can be secured extremely quickly once the parties come to an agreement about the terms. Typically the qualification process is simpler, more efficient, and less expensive. There are a few things to keep in mind, too. Interest rates are typically higher with a greater overall return on investment for the financer. Most loans have short terms, and the underlying real estate serves as collateral for the financing. Usually the borrower must show the property’s income potential in order to obtain the loan, which can be challenging. These are a few of considerations for anybody looking at commercial real estate financing.