Commercial mortgages are a high priority issue for any small business that either has commercial real estate financing or needs to obtain it
. Most small businesses probably noticed that banks seemed to change their approval process for commercial mortgages starting several years ago. While few banks will openly admit to how much they have changed their willingness to make any small business financing, commercial real estate loans to smaller companies have clearly changed in ways that understandably confuse many commercial borrowers.
The fluctuating real estate market has certainly impacted how banks finance both residential and commercial property. A major piece of this puzzle is the appraisal process, and improper real estate appraising has caused problems for many banks. There are quite a few differences between how properties are appraised for a residential mortgage and a business mortgage. To compound this aspect, the entire loan process is quite dissimilar for a residential loan and a business real estate loan.
One issue in particular that has been causing concern for many small business owners is their need to refinance an existing commercial mortgage. In some cases the refinancing will be sought by a commercial borrower because (1) they want to arrange a lower interest rate or (2) they are attempting to get some cash for business operations by reducing their equity ownership position. Both of these financial goals for the loan are likely to appear prudent to the borrower, but banks are especially restrictive when it comes to taking cash out during refinancing.
An even more problematic business refinancing scenario will occur when the current commercial lender notifies a small business that the existing commercial mortgage must be refinanced with another lending source within a relatively short period of time. The ability of a bank or other lender to literally force a commercial borrower to refinance their business mortgage will be specified in the initial loan agreement. More often than not, a small business owner will not be aware that such a restrictive loan covenant even exists in their financial agreement. One of the most critical factors in this situation is the element of surprise that causes a financial problem for a company at an unexpected time.
To avoid unnecessary complications such as those identified above as well as related ones, small businesses should evaluate their real estate financing options at the earliest possible time. The most prudent approach is to engage in contingency planning before something goes unexpectedly wrong with commercial mortgages or other forms of small business loans. When this is not feasible, it is advisable to obtain help from a commercial mortgage expert on a timely basis.