One of the principles that has been true for generations is that money helps to generate more money. This is the cornerstone of the commercial mortgage market. Lenders offer money to borrowers to purchase commercial property and make money on the mortgage. A commercial mortgage and a residential mortgage have a great deal in common. Just as you use the house as the collateral in a residential mortgage, the commercial property is the collateral in a commercial mortgage. Those who borrow money on a commercial mortgage are typically businesses or business owners.The property is usually held up as collateral in a commercial mortgage. If the borrower fails to pay the amount owed on the mortgage, the property can be taken by the mortgage lender. This is typically the recourse taken by commercial lenders when there is a default on the payment.There are many reasons for a commercial property loan such as expanding a business or developing land. Some businesses may use a commercial mortgage to pay down debt or increase the capital they need for the operation of the company. The properties used in a commercial mortgage include warehouses, offices and retail stores. There may be different terms used in a commercial mortgage than those used in a residential mortgage.Commercial lenders will analyze the proposal to determine if the terms are appropriate for the lender. The borrower is examined to determine if they have the capability to repay the loan. The business as a whole is looked at by the lender to determine if the business has the capacity to earn the amount of the loan. A commercial lender is in business to earn money. When a business does not meet their criteria for lending, it is not in the best interest of the mortgage lender to lay out the money with a less than favorable probability of it being returned.The value of the property is used to determine the loan amount on a commercial loan. The borrower is not considered in the credit, but instead the entire businesses credit is used to determine the worthiness of the borrower. Commercial loans differ from residential mortgages in that it is much easier to recover a commercial property in the case of bankruptcy than it is a residential property.Commercial mortgages are designed to benefit the borrower and the lender. Both parties are interested in making money on the transaction. The lender is making money on the amount of money that they can reasonably lend to businesses and businesses can expand and increase their profit. Both parties take a risk in the transaction, but the rewards make the deal much more palatable for lenders and borrowers in commercial loan transactions.
Can you believe that 50% of first year businesses do not make it to the next year? Did you know that 95% of businesses fail within 5 years of being established? It is because of these percentages that lenders and other financial organizations consider many small businesses to be ‘high risk’.High risk businesses (and even some non-risk businesses) have an extremely difficult time finding and obtaining business credit. So, why are lenders so afraid to lend out funding to start-up and current businesses?Let’s take a look the real side of small business access to credit….Uncertain EconomyAn uncertain economy has a lot to do with the ability of a small business access to credit. During a recession, or even a falling economy, people are not spending money. Therefore, they are not going to small businesses for materials like they do when the economy is good.Small businesses are not getting near enough business to stay afloat and lenders are perfectly aware of it. Lenders are skeptical to lend out money in fear of never seeing repayment.Outstanding Loans And Credit Card BalancesThis goes hand in hand with the uncertain economy. More business owners default on a loan during a rough economy. Lenders have hundreds of thousands of dollars in back loans that they are unable to provide more opportunities for small business access to credit.If they are not paid for the capital they have lent out, they could risk going out of business themselves. This is especially true for private organizations that need the paid interest rates on loans and credit cards to keep them going.Lending Standards Restrict Small Business Access To CreditThe lending standards that the government places on small business loans and credit cards have a lot to do with small business access to credit. Tighter regulations for small business loans means less and less business owners will qualify for the credit they need to keep their businesses in business.Stricter regulations will help the lenders keep the money in house, but they will also increase the unemployment rates as small businesses will be going out of business. It is critical that small business access to credit be open or we could see a drastic decrease in the amount of business opportunities available to people.All of these factors contribute to why lenders are not offering business credit to businesses. Small business access to credit is becoming smaller and smaller and smaller. So, if you are considering starting your own business I want you to understand the ‘Why’ so you feel more confident when you begin your quest to obtain credit for your business.Hey! It’s not just me whining and crying. This attitude is out there regarding small business credit. I am just letting you know. Here is just one article in The Wall Street Journal – A Credit Crunch That Lingers.Keep in mind that this type of thinking and this flow of information will discourage a lot of people from seeking small business credit leaving more opportunity for those that do want to succeed and who also realize that it is just a matter of understanding how the credit game works when it comes to getting business creditKnow what to do and how to do it, and ideally before you start to do it, and your chances of success will be much higherAnd after all, how can we expect a business to flourish when there is very little small business access to credit? It almost seems as though businesses are being set up just to fail…. BUT!Remember the more people turned off by all the negative news on the economy is this ‘credit crunch’ the more room left for you to bear down and start or expand your business!