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Commercial Mortgages: What Small Businesses Need to Know

Commercial mortgages can help small businesses reach the financial success they are aiming for.  While going through the commercial mortgage process, there are many mortgage terms and a vast amount of financial information to absorb in a short period of time.  At APEX, we put together this quick reference guide to help explain common commercial mortgage terms and what small businesses need to know about the terms.

Commercial Mortgage Language and What It Means for Small Businesses

  1. Commercial Mortgage
    A commercial mortgage is a mortgage loan made using commercial real estate as collateral to secure repayment.  Commercial mortgages are very similar to residential mortgages; the major difference being collateral is a commercial building or other business real estate and not residential property.
  2. Commercial Mortgage Collateral
    Commercial mortgage collateral is an income-producing property, e.g., multi-family housing, retail, office, warehouse, mixed-use, pledged for the repayment of a loan.
  3. Cash Flow Statement
    A cash flow statement is a financial report that describes the sources of a business’ cash and how it was spent over a specific period of time.  Cash flow statements show how companies have performed in managing inflows and outflows of cash. It provides a clear picture of a company’s ability to pay back creditors and financial growth.
  4. Terms of a Commercial Mortgage
    In the United States, commercial mortgages may offer the following terms, depending on your agreement:

    • Fixed Rate: Where the interest rate on the Mortgage Note remains the same through the term of the loan.  Resulting in the borrower making fixed payments for the life of the loan.
    • Adjustable Rate (ARM): When the interest rate on the Mortgage Note periodically adjusts on specific dates (e.g., monthly, every six months, annually).  The rate is stated as a margin over a published index such as the 10-Year Treasury or the 11th District Cost of Funds Index (COFI).
    • Balloon Payment: A mortgage that does not fully amortize over the term of the Mortgage Note, therefore leaving a balance due at the time of maturity.  For example, a ten-year balloon mortgage, with scheduled payments to amortize the loan in 30 years, will see part (but not all) of the principal paid down through year ten, at maturity.
  5. Amortization
    Amortization is the distribution of loan payments into multiple cash flow installments.  Each repayment installment consists of both principal and interest. For example, if a loan is “fully amortized,” then the very last payment (which, if the schedule was calculated correctly, should be equal to all others) pays off all remaining principal and interest on the loan. If the repayment model on a loan is not fully amortized, then the last payment due may be a large balloon payment of all remaining principal and interest.
  6. Loan-to-Value Ratio (LTV)
    LTV is the ratio between the principal amount of the mortgage balance, at origination or thereafter, and the current value of the underlying real estate collateral.  The ratio is commonly expressed to a potential borrower as the percentage of value a lending institution is willing to finance.  The ratio is not fixed and varies by lending institution, property type, geographic location, property size and other potential variables.  For properties in the United States, a typical LTV Ratio is between 60-80%.

How Small Businesses Can Benefit From Commercial Mortgages

Small business owners are faced with a variety of challenges when operating their business, such as cash flow, real estate taxes, inventory needs, etc.  Obtaining a commercial mortgage can provide many benefits that will enable a small business to grow, expand and improve their current business.  For example, an auto repair shop owner may want to install an additional lift in their garage so that he can increase the number of vehicles serviced to help grow their business.  If your own and operate a warehouse, you may have run out of space and are thinking about purchasing the empty lot next to your existing warehouse facility to expand your storage capacity, enabling you to take in more inventory, which means more customers.

Whether you are running a daycare center, an auto repair shop, an apartment complex, an office building, a hotel or any other type of business, commercial loans can open a world of opportunities for you and your business.  Get started today!

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