Commercial lending can be difficult to navigate if you have complex financing needs. So it pays to know the differences between various types of loans. In the traditional banking sector, you have things like standard business financing packages and low-interest loans backed by the Small Business Administration (SBA). In the private sector, you have access to things like bridge funding and hard money loans.
Is traditional commercial lending better than private lending? No. Both types of lending have advantages and disadvantages. Comparing the two is a good move for any commercial borrower whose financing needs are atypical.
Actium Lending is a Utah hard money lender specializing in commercial real estate funding. They recommend that any borrower in need of commercial loans consider the following:
1. Lending Criteria
A lender’s criteria largely determines whether a borrower will qualify for a loan. Traditional lenders based their criteria on a borrower’s creditworthiness. A borrower must be able to demonstrate:
- Sufficient income and assets
- A good credit history and score
- A reasonable income-to-debt ratio
The lending criteria for hard money and private bridge loans are comparatively less complicated. The priority for lenders like Actium Lending is collateral. Borrowers are expected to put up high-value collateral capable of covering the amount they hope to borrow. Decisions are made primarily based on collateral value.
2. Funding Speed
Being able to work much more quickly than traditional banks is a huge selling point for private lenders. Although most hard money and bridge loans are funded in 3-7 days, Actium Lending has been known to approve and fund in as little as one business day.
When a borrower’s financing needs are time sensitive, hard money is awfully attractive. Obtaining funding in a matter of days can make it easier for borrowers to accept higher interest rates in shorter terms. And funding within a week is far more attractive than the 30-90 days traditional lenders often require.
3. Rates and Terms
Borrowers more particular about rates and terms might find traditional financing more attractive. Interest rates on traditional loans are pretty much in line with the federal rate. Terms can be anywhere from 5 to 30 years.
Rates on hard money loans tend to be at least one or two percentage points higher than their traditional counterparts. Terms are also exceptionally short. It is rare for a private lender to exceed 36 months on a hard money loan. The limit is usually 24 months. On average, hard money and bridge loans have terms of 6-12 months.
4. Documentation Requirements
Traditional lenders require a ton of documents during the underwriting process. Borrowers will submit a minimal set of documents for approval purposes, but then furnish additional documents as needed until the loan closes. It’s not unusual for underwriters to still be looking for documents days before closing.
Private lending’s asset-based approach minimizes documentation requirements. In nearly every case, all the documents a lender requires are furnished with the loan application. Once approved, a borrower usually doesn’t have to submit anything further.
5. LTVs and Down Payments
Finally, there are differences in both loan-to-value (LTV) ratios and down payments. Traditional lenders usually offer higher LTVs. That translates into lower down payments. Private lenders are just the opposite. Their lower LTVs require higher down payments from borrowers.
Certain scenarios are best served by traditional financing. Other scenarios are more suited to private funding. Each borrower needs to decide for himself which way to go. Fortunately, both options exist. They give borrowers clear choices for meeting their financial goals in a cost effective, efficient, and profitable way.