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Borrowers seeking bad credit commercial loans have basically three options. However none of these options are ideal. They are money loans, commercial hard money loans and SBA 7a Loans And due to the credit crisis these options are becoming more and more limited. Never before has personal credit been so important for commercial loans.
This may seem painfully obvious, but worth noting that everything should be done by the borrower to restore/improve their personal credit score. Commercial loans with bad credit are very expensive and also very hard to get funded in this market. We are currently in one of the worst credit crisis’s since the Great Depression and banks are getting very conservative. Credit scores are very easy for banks to identify and “pick on”
As far as the expense, the difference in payment on a $1,000,000 loan amount with a rate at 7% (is $7,067) vs 9% (at $8,391) is significant. That a $1,324 per month increase, or:
- $15,891 per year increase in payments, or
- $79,497 increase in payments over a 5 year period
Thats real money, cash out of your pocket… Thats not potential equity build up, or principle paydown, etc but real cash out of your hands. And this does not include the other costs to do loans. For example, SBA 7a loans normally have a 2.75% “guarantee fee” which are points the Small Business Administration charges. On a $1,000,000 loan amount that would be $27,000 in fees you would have to pay. Hard money is more expensive. Expect to pay 4-6%, again thats $40,000 – $60,000 in fees just to close the loan.
If you are serous about getting a commercial loan and you currently have bad credit you need to improve your score. As mentioned above it is very difficult to find a bank that will close a bad credit commercial loan and if they will, you the borrower, will pay dearly for their flexibility.
Poor Credit Commercial Mortgages – Commercial Hard Money
Most borrower think of commercial hard money as there only source for bad credit commercial loans. Most hard money commercial lenders are interested in the properties equity and or its cash flow and the borrower’s credit score is often just an afterthought. Commercial hard money lenders want to see at least a 60% loan to value in order for them to seriously consider funding the deal. Also, the exit plan of the borrower is critical. In other words, how is the lender going to get there money back when the loan balloons? Speed and flexibility are the main benefits. The expense is the downside. Borrowers should expect to pay 3-6% points and have a rate around 13-16%.
Commercial Mortgages with Bad Credit – “Story Lenders”
“Story lenders” (which is not a real term) are basically banks that are willing to listen to the borrower’s story about their difficult situation. They are often willing to overlook many difficult situations such as bad credit, weak business cash flow, high loan to values, etc. The important thing here is that these banks will need to be convinced that there is a logical reason for the issues and that the issues have been resolved. The borrower will have to document there case thoroughly and be willing to provide other sources of business for the banks, such as deposits, benefits,
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