It’s not uncommon for a business these days to turn to private mortgage financing of a commercial property to inject the necessary cash into the business to keep the doors open as the economy tries to turn itself around.
And for many business owners who have never had to utilize private money in the past, they may reluctantly take it on and try to pay the higher private commercial mortgage rates for as short a time as possible.
This is definitely a good strategy, provided that you have an accurate assessment of the amount of time your commercial mortgage from a private lender needs to be in place.
For instance, most private mortgages are only for a period of one year.
So, is it realistic that within one year the business will have returned to more historical levels of financial performance that will allow it to refinance the private mortgage through some combination of internal resources and bank or institutional commercial mortgage financing?
A year can go by pretty quickly, and it will also take time to get third party financial statements prepared to support a strong financing position.
Therefore, even though you may not be crazy about paying private mortgage interest rates for a longer period of time, it may be a good idea to consider a two or even three year term, or at least a renewal that allows you more time if you need it (provided that such options are going to be available).
Failing to do this and running out of time on a one year private commercial mortgage can end up being pretty expensive as the solution may end up being starting from scratch with another private lender, paying broker and lender fees again as well as legals to essential keep the same money in place for a longer period of time.
Estimating time in this regard as two considerations. First, how long does the business need to rely on private money before its in a better borrowing position and second, how long is it going to take to get lower cost commercial mortgage financing in place once things do turn around.
In many cases, both of these considerations can take more time than you estimate, which means that some amount of time buffer needs to be built before committing to essentially a bridge loan to fund the working capital of your business.
Its better to be a bit conservative and pay a bit longer than risk incurring considerable incremental costs through having to refinance a second time after your one year term expires.