The 5C’s of Finance: Business Loans

When you go to a bank or financial lending institution there are 5 key things they will take into consideration before approving a loan. These “5 Cs” apply to both personal and business loans. Since the bank or lending institution are in business to make money, they take these 5 things very seriously and you will want to be prepared before applying for a business loan. The 5 C’s in no particular order are capital, collateral, conditions, character, and capacity. Here we will deal specifically how they apply to a business loan.

Capital is the money you personally have invested or will invest in the business. When applying for a business loan the prospective lender wants to see what kind of risk are you willing to make to see this business succeed. The more you personally have invested in the business the more likely you are to work your hardest to make sure the business is a success. If you are not willing or prepared to make a sizable financial investment in the company, more than likely the lender will not be willing to take a risk either. If your business is already operating you will be asked to provide personal and business records showing every detail of the business including tax records, accounts payable, and accounts receivable.

Collateral is personal and or business assets that you are willing to put up as security in the event the business cannot repay its loan. The bank wants to know there is a second source of repayment. Equipment, buildings, accounts receivable, and in some cases, inventory is considered possible sources of repayment of the business loan, anything the bank can sell for cash. Both business and personal assets can be sources of collateral for a business loan. Collateral should not be confused with a guarantee. A guarantee is when someone else signs a guarantee document promising to repay the loan if you can’t. Some lenders may require both collateral and a guarantee as security for a business loan.

Conditions refer to the purpose of the business loan. Will the money be used for working capital, additional equipment, or inventory? Other conditions the lender will consider are the economy and conditions not only within your business but also in businesses that could affect your business (your suppliers and or service companies included).

Character is the impression you make on the potential lender. The lender determines whether or not you can be trusted to repay the business loan if granted. Some of the things the lender might ask for are your educational background, your experience in business and in your industry. More than likely they will request references for you and the background and experience of your employees may also be considered.

Capacity to repay the business loan is the most important of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on other credit relationships, personal and business, is considered an indicator of future payment performance. A business must be able to pay all its debts, not just its loan payments, as they come due. Applicants are generally required to provide a report on when their income will become cash and when their expenses must be paid. This report is usually in the form of a cash flow projection, broken down on a monthly basis, and covering the first annual period after the loan is received.

Before applying for a business loan keep the 5 Cs in mind and be prepared. Taking time to organize, have your plans in writing, and a positive attitude will take you great steps towards receiving the financial backing you are seeking for your business.

Carbon Finance Ltd

Hard Money Lender Real Estate – Financing Options For Investors and Borrowers With Bad Credit

Hard money lender real estate loans provide borrowers with poor credit the chance to purchase a home. These types of loans are considerably more expensive than traditional home loans financed through mortgage lenders. This type of financing is intended for interim use while borrowers rebuild or establish a credit history.

Hard money lender real estate financing is also used by investors to purchase commercial properties or realty intended for house flipping. Investors sometimes use this type of financing to buy properties that are not in marketable condition because this type of realty does not qualify for conventional financing through banks.

Hard money loans are referred to as ‘bridge financing’ because they bridge the gap for individuals who do not qualify for funding through a mortgage lender. Bridge loans can be used in addition to conventional loans and are often used with seller carry back financing.

Seller carry back is a lending option that helps individuals buy real estate by combining bridge loans with conventional mortgage loans. The property owner provides a portion of financing for one to two years and the balance is financed through a bank, credit union or mortgage lender.

For example, the Seller lists his property at $250,000 and offers to carry back 40-percent financing, or $100,000. The buyer obtains a conventional home mortgage loan for $150,000. The buyer has two mortgages against the property. The bank carries the first mortgage and the seller carries the second mortgage. Carry back financing is generally limited to 70-percent maximum of the property’s current market value.

Interest rates applied to bridge loans are substantially higher than interest applied to conventional home loans. Private financing interest rates are regulated by state usury laws. On average, bridge loans are charged an interest rate of 11- to 21-percent. At present, Florida has the highest usury rate which is capped at 25-percent.

Seller carry back real estate contracts often include default clauses which allow sellers to increase interest rates if borrowers become delinquent with loan payments or default on the loan and enter into foreclosure. Default interest rates can soar as high as 29-percent. Buyers can determine maximum hard money loan interest rates at UsuryLaw.com.

The amount of interest charged with bridge loans can vary depending on the amount of borrowed funds, as well as the funding source. Private real estate investors generally charge a lower interest rate than investment groups. Hard money loans for residential property typically carry a higher rate of interest than commercial property loans.

Bridge loans sometimes include a prepayment clause, penalizing borrowers who pay loans off early. One primary goal is to refinance hard money loans through a conventional mortgage lender as quickly as possible. A six-month prepayment clause is tolerable, while a two year penalty clause is unacceptable. It is highly recommended to consult with a real estate lawyer before entering into hard money borrowing.

Overall, hard money lender real estate loans are not the preferred method for financing. However, bridge loans allow borrowers with less than perfect credit the opportunity to buy a home and provide funds to investors for residential and commercial investment properties.

Hard Money Loans to Stop Foreclosure Immediately

Hard money loans are specialty loan products, only taken on by investors who are willing to invest in high risk loans. The loan to value ratios are low, the interest rates are higher, the points or fees are typically much larger than other mortgage loans, and these types of loans are often due and payable sooner.

The financing criteria for a hard money loan is often based exclusively on the value of the collateral which is the property being financed, and no or very little consideration is given to a borrower’s credit. This means that even a person in foreclosure whose credit and credit score has severely declined can qualify for this type of loan if there is a sufficient amount of equity in their property that reduces the investor’s risk.

The loan to value is 65 per cent or less. But, hard money lenders really prefer making loans on properties with a loan to value of 50 per cent or less. Interest rates on these loan will be substantially higher than other mortgage loans, often 12 per cent or even greater. Often they are interest only loans so that none of the payments apply to the principle.

In addition, a hard money loan will charge the borrower the maximum amount of points allowed under mortgage law regulations. So expect to pay at least six points or six percent of the loan amount to acquire this financing. These loans are often amortized over 30 years, but are due and payable within eighteen months to five years.