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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   May 2015

Redefining the Meaning of “Commercial”

With the right products, originators can tap into business they never thought possible

With the right products, originators can tap into business they never thought possibleMany commercial originators spend an inordinate amount of time trying to pin down large real estate purchases and refinances. And that’s not surprising because commercial real estate is frequently tied into originators’ loan requests, making it easy to fall prey to this kind of tunnel vision.

Originators should realize, however, that today’s market offers a wealth of commercial loan transactions that are not secured by commercial real estate. If you’re not focusing on this facet of the market, you may be missing out on a potentially huge revenue stream.

Today’s commercial market is diverse, teeming with innovative new loan products, many of which are not property-driven. Pursuing these deals can help you grow your business and enrich your bottom line.

Rethinking “commercial”

A commercial loan is defined as any financing that’s used for a non-consumer purpose. In other words, as long as a loan isn’t going to be used for a personal reason — i.e., paying off a student loan, purchasing a primary residence, etc. — that loan is considered commercial.

You may assume that the “personal” exclusion leaves room only for loans intended to buy or refinance commercial real estate, but this isn’t necessarily the case. The commercial loan classification also includes loans to borrowers who need capital for their businesses and can include loans against residential real estate, provided that the residential property will be used for business or investment purposes.

With that in mind, let’s take a closer look at two segments of the market that originators may want to pursue in greater force: small-business owners and residential property investors.

Small-business owners

Today, there are 23 million small businesses in the  United States, and many of these business owners can’t get financing because they don’t meet stringent bank and U.S. Small Business Administration guidelines. Even businesses that can meet these guidelines often need capital more quickly or for purposes other than what traditional financing sources allow.

Although many commercial originators believe they can provide financing only for small-business owners with commercial real estate or hard collateral to  leverage, the reality is that an emerging segment of  private-money lenders is poised to make small-business loans strictly on the basis of business cash flow, with no real estate or collateral needed. Unlike the expensive merchant cash-advance loans of previous years, these new loans are fully amortizing products with terms from six months to five years and carry rates as low as 8.99 percent.

In addition, these loans often include minimal or no prepayment penalties and they can close quickly — anywhere from two days to two weeks. These features can be a boon to many small-business owners, and originators would be wise to take advantage of that fact.

Residential investors

Although small-business owners likely represent the largest demographic of potential borrowers in today’s market, the pool of residential property investors may be a close second. Many originators are already aware of this, but what you may not realize is that a handful of enterprising lenders are now making commercial loans on residential property — and others are sure to follow.

A handful of enterprising lenders are now making commercial loans
on residential property - and others are sure to follow.

Lenders are making these loans under a commercial classification; that is, the property must be used for business or investment purposes and typically should be held in a corporate entity. These loans aren’t just for investors purchasing single-family residences. Many lenders will consider taking on two, three- and four-family properties, as well as blankets of residential properties. This means that commercial brokers not licensed for residential loans now have instant access to a substantial and previously untapped client base.

Additional benefits

Originators who pursue these market segments can gain an immediate infusion of new business, but this isn’t the only benefit offered by taking on  private-money business and residential investor loans. These segments offer an added plus: The loans close fast.

Eliminating the collateral requirement from the loan process and focusing exclusively on business cash flow means that you no longer need third-party reports and the slew of additional documents often required for real estate-backed commercial loans. When dealing with residential investment property, appraisals are cheaper, turnaround times are faster and the transactions themselves have fewer moving parts, all of which expedites closing.

As if this wasn’t enough, there’s a cherry on the cake, too: Some private-money and residential investor lenders offer compensation as high as 4 percent, 5 percent or even 6 percent of the loan amount. All things considered, it’s hard to beat faster closings and bigger pay days.

•  •  •

As 2015 progresses with an improving commercial-lending marketplace, it’s time to discard certain preconceived notions of what defines a commercial loan and expand your horizon to include a wider base of products. There are multitudes of untapped borrowers out there with whom you can find lucrative new business. Many of these borrowers will be delighted to have access to creative new loan products, making you the hero and the innovator in equal measure. 


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