A non-bankable commercial loan is described with the term, “commercial hard money.” This applies when a company or individual has assets or real estate that are enough to collateralize a commercial loan, but lacks standard criteria for a bank loan. A loan would be reluctant to lend if a property owner is losing money or has poor credit, additionally.
When commercial loans involve taking higher risks than banks are equipped or willing to handle, hard moneylenders will lend what is termed, “Commercial Hard Money.” These results in a loan that costs much more to the borrower than a conventional loan would cost. For example, a conventional bank might charge a 7.5: finance rate and a single point, while a hard money commercial lender will typically charge from 11-13% and add three points.
The commercial hard moneylender looks generally to the property itself as a possible source of repayment. Should the borrower not be able to make the loan payments on time or skips a payment, the commercial hard moneylender will likely foreclose on the property and sell off the collateral. However, the caveat is that the commercial hard moneylender does not really want to own a borrower’s commercial property.
Typically, a commercial hard money loan is one that is understood to be over the short term. In fact, one-year loans are the most common types. However, the borrower should take care to ensure that negotiating a loan term of up to three years on the current market is in the mix. Contrary to popular belief, there is a lot of money available to finance good hard money deals despite the current state of the economy.
Borrowers should beware of prepayment penalties and exit fees involved with a commercial hard money-financing situation. In the case of an exit fee, some lenders will charge a large fee if the borrower decides to pay off a loan that is not the pre-arranged due date. This is regardless of whether the pay off comes early, late or even on time. It is very important to read the fine print.
Borrowers should also be cognizant of exorbitant late fees on any balloon payments. Hard money loans that are short term usually end up being paid off late. This is true for at least 70% of the time. It is common for hard moneylenders to attempt to add huge late charges on the balloon payments. These can be as high as ten points.