When seeking business or commercial real estate loans, there are multiple factors to consider. While rates are often the primary factor borrowers use to evaluate a loan, it is important to review additional factors. Which is more important? That depends entirely on the loan use, business circumstances, borrower situation, and lender contingencies. Following are overviews of the broad definitions.
Terms
The term of a loan specifies the amortization or payoff schedule, which determines the fixed rate in monthly installments. You can assume that the shorter your loan length, the higher your monthly payments will be. Often commercial loans will have clauses regarding early payoff penalties, business structure requirements, other loan restrictions, and more. Paying Attention to your loan’s structure and how they impact your unique situation is essential to choosing the best funding source for your business and commercial real estate needs.
Rates
The rate of a loan refers to the interest charged on the total amount borrowed. Your loan’s agreed-upon rate determines how much extra money you will pay back over time on top of the loan amount you receive. While lower rates often seem best, it is common to see restrictions on lower rate loans that become prohibitive and punitive in specific business cases.
Prepayment Penalties
A fee is paid to the lender to pay off the loan before the end of the term. This fee can vary per loan and lender. Understanding your strategy to hold or sell an asset and how your prepayment penalty can impact this strategy is essential.
Loan Covenants
Covenants are found within loan agreements providing rules or promises the borrower makes to pay back the loan per the loan’s terms and conditions. These covenants can vary per lender and impact how you conduct your business.
Which is more important, terms, rates, prepayment penalties, or loan covenants?
More often than not, borrowers focus on rates of business and commercial real estate loans over terms. It may seem illogical to pay a higher interest rate in the balance of better terms, prepayment penalty, or loan covenants. Borrowers want to nail down the lowest rates possible to avoid costly interest payments over time. However, the length of your loan, penalties for early payoff, business restrictions might interfere with your business’s operations. Paying a higher rate can provide less headache for your business over the term of your loan.
There are multiple factors to consider when deciding what loan works for you and your business. A clear understanding of the best-case scenario for your unique situation is critical when beginning the process of soliciting a loan. As you search for the right funding to meet your individual needs, our team at Innovative Capital is ready to help you.
Our loan officers have long-standing relationships with commercial bankers and private money who can facilitate loans faster and with more refined specificity than any one relationship with a single bank can provide. Our team works to prepare multiple loan options for you to choose from. You only pay when we provide a funding option that you select.
Reach out to schedule a call to review your upcoming business and commercial real estate funding needs.