This real estate and business financing article discusses a concept which is referred to here as “Thinking Outside the Bank”. It is meant to be a variation of the well-known “thinking outside the box”. Despite the prominence of traditional banks, they are not the only viable source which should be considered for a commercial mortgage or commercial loan. There are many reasons why a commercial borrower might not go to a traditional bank for a commercial real estate loan or other business finance circumstances.

Business borrowers have more commercial mortgage and commercial loan alternatives than they realize. As noted above, I refer to these business financing alternatives as “Thinking Outside the Bank” because a typical commercial borrower probably believes that a bank is the best source for a business loan in business investing situations. Non-traditional business lenders are usually viewed as having the competitive edge for many common commercial financing and commercial real estate investment property financing scenarios.

In some cases a traditional bank will offer to provide a business loan but will attach excessively stringent terms and covenants. In other cases a traditional bank will decline the commercial mortgage outright, perhaps because they do not even provide business financing to the commercial borrower’s particular industry. In either case, the commercial borrower is likely to benefit by “Thinking Outside the Bank” for their business investing efforts.

Commercial loan borrowers might feel that a bank is their most likely source for business financing. However, since traditional banks usually focus on a few types of businesses and commercial real estate investing, non-traditional business lenders should be emphasized for any business loan situation. Therefore the recommended business finance and commercial mortgage strategy discussed in this article is to “Think Outside the Bank”.

As I reported in a previous business financing and investing report, in many commercial mortgage situations it is common for a local bank to assess stricter commercial loan conditions than would typically be seen in a competitive business loan scenario. Such banks can often take advantage if there are few business lenders in their market.

A prudent response by business borrowers is to consider non-traditional commercial mortgage options. It is not necessary for borrowers to depend upon traditional banks for business loan strategies. For typical commercial loan scenarios, a non-bank lender can often provide better business financing terms because of the competitive market situation.

There are at least three business financing situations in which business borrowers will typically experience that non-traditional lending sources can provide conditions that are best for the borrower: (1) commercial real estate investment property loan programs; (2) credit card factoring and business cash advance programs; and (3) working capital management programs for credit card processing.

Business Loan Investing Options – Commercial Real Estate Investment Property Loan Programs -

Two of the most common commercial mortgage difficulties experienced by commercial borrowers can be avoided if they “Think Outside the Bank”. The first business financing situation is the prevailing practice of traditional banks to avoid most special purpose investment properties (such as funeral homes and golf courses).

A second business loan possibility is the frequent practice of many commercial banks to add recall and balloon conditions to their commercial loans. The bank can then require early payoff of the commercial real estate loan under stipulated conditions. Both business financing situations can easily be prevented by a non-traditional lending source.

Business Financing Choices – Business Cash Advance Programs -

Most businesses that accept credit cards will qualify for a business cash advance with their credit card receivables. Traditional banks will typically be very poor candidates to consider if a business needs assistance with credit card factoring and business cash advances.

Because successful business owners typically need more working capital than they can obtain from a bank, it is important for a business to “Think Outside the Bank” with non-traditional lenders to help with this working capital management function.

Credit Card Processing Programs – Working Capital Management Choices -

The selection of a credit card processing service can be critical in improving the cash flow of a business with significant credit card activity. Credit card processing providers can be combined with the credit card financing process mentioned earlier.

In coordinating a business cash advance and working capital business loan program, it is usually possible to achieve improvements in the business owner’s credit card processing services. Traditional banks are usually not competitive in providing assistance with a business cash advance using credit card receivables. So it is likely that a non-traditional lender will be the major source of competitive help with credit card processing improvements.

A closing business financing and commercial real estate investment property financing thought: I have written an earlier business loan article about commercial lenders to avoid. It should be noted that there are in fact both traditional and non-traditional (non-bank) lenders which should be avoided.

When business owners are “Thinking Outside the Bank”, they should be ready to avoid troublesome non-traditional business lenders in their investment quest for worthy working capital management dealing with commercial real estate loans, credit card financing and credit card processing.

By devoting extra caution and time, commercial borrowers can avoid serious business opportunity investment financing mistakes. The most obvious benefit will be to reduce the potential for critical commercial loan problems, both now and throughout the life of the business financing terms arranged.

A key factor that distinguishes business opportunity financing from other forms of business financing is the lack of commercial property ownership. Although the transaction will usually involve a long-term lease agreement, the buyer is acquiring a business that does not include real estate in the purchase price.

The two mistakes described in this article are more typical than expected by most commercial borrowers. While we will not be addressing all possible business opportunity financing problems in this article, we will include two of the most severe issues to anticipate and avoid.

Length of Business Financing -

A common mistake when acquiring a business opportunity is to finance the acquisition with business financing that expires within two to five years. One reason for this occurring is the failure to negotiate a longer-term lease, since it is typical for financing terms to expire with the lease.

A viable solution is to insist on a lease that is at least ten years long. This will facilitate business finance terms that can typically be for a ten-year period. One key factor that limits business opportunity financing to a ten-year period is due to the absence of commercial real estate collateral.

Use of Excessive Seller Financing -

Although nominal seller financing (such as 10-20%) can be helpful to a business financing transaction, attempts to finance either entirely or primarily with seller financing are generally inadvisable. There are several different issues which can result in this being a serious mistake.

If a seller is providing most or all of the business acquisition financing, a formal appraisal might not be obtained. While this appears to offer the advantage of saving the cost of such an appraisal, it also eliminates an important method of determining if the purchase price is appropriate. It is also not uncommon for a seller to have acquired a business appraisal that is used to substantiate the purchase price for the business they are selling. An appraisal financed by the seller is not likely to be an independent business value estimate.

An additional restriction when using excessive seller financing is that it typically will cover a period of three years or less. This will necessitate refinancing within a period that is not always practical to do so. A loan history up to 48 months will be required by some lenders prior to refinancing a business opportunity loan.

Solutions and Strategies for Avoiding Business Opportunity Investment Loan Mistakes -

Business borrowers should thoroughly discuss options with a business financing expert before proceeding with investing and financing programs. These efforts will be worthwhile since the potential business finance mistakes described above can be overcome successfully. Borrowers should seek out advisors capable of providing candid solutions in their efforts to obtain a better picture of complicated business opportunity financing possibilities.

Buying a business investment without real estate requires specialized business opportunity financing. Although this kind of business financing is available, there are several potential problems which should be anticipated and avoided by prospective buyers.

In order to buy a business, a commercial borrower is likely to need business financing. If the business includes commercial real estate, the borrower will need a commercial mortgage. If the business purchase does not involve real estate, a business borrower must use a business opportunity loan.

When obtaining a business opportunity loan, borrowers will discover that many lenders simply do not provide business loans that do not include real estate as part of the business purchase. There are several other important business financing issues to analyze prior to buying a business without commercial property.

The level of interest for buying a business opportunity investment has increased due to the reduction of activity involving residential real estate investing. However, because there are so many critical differences between financing residential real estate and business financing, it is important for potential business owners to educate themselves before proceeding.

This summary is designed to address the unique business financing requirements involved when real estate is not involved. Our suggested approach to business opportunity financing is provided below.

Prospective business owners should begin business opportunity investment financing plans by formulating a realistic assessment of cash available for a down payment and desired maximum business purchase price. In most business financing scenarios, a total down payment approximating 25% of the purchase price is advisable. Usually seller financing is permissible for a portion of the down payment, but a potential buyer generally needs to plan on investing a minimum of 10% or more of the purchase price from their own funds even if the seller is providing 20% or more.

Purchasers should evaluate whether a Small Business Administration loan is relevant for their particular business financing and investing circumstances. This step is both important and somewhat complicated, and the involvement of an SBA loan expert is strongly advised. Among the issues to explore are whether collateral is available for SBA financing and how important refinancing is to your overall business opportunity financing process.

Buyers should make an early determination concerning the length of lease to be arranged in conjunction with buying the business. As noted previously, business opportunity financing and investing does not involve the purchase of commercial real estate, so arrangements must be made for a long-term lease. The length of the lease is important because the normal business finance terms will restrict the length of business financing to the period covered by the lease (although buyers should anticipate a ten-year maximum for investment business loans). For example, with a seven-year lease, the commercial loan is likely to be for seven years, and even with a fifteen-year lease, the commercial financing will probably expire in ten years.

Even though real estate is not included in a business opportunity transaction, buyers should nevertheless investigate whether including real estate is a viable option or not in order to buy a business. With the inclusion of commercial property, you can obtain a longer business loan and the interest rate will be lower. However, improved business financing terms should not be the sole factor you look at, since the absence of a commercial mortgage can prove to be a significant advantage in a declining real estate market that currently exists in many areas of the country.

Investors and buyers should discuss business finance options with a business opportunity loan expert before making any offers to buy a business investment. These discussions should include issues such as down payment possibilities, potential purchase price, seller financing, tax return requirements, buyer credit scores and collateral options.

As a final precautionary note, in most circumstances the availability of business opportunity financing is more restricted than commercial real estate financing. There are also some problems unique to business opportunity loans, and commercial borrowers should make every effort to avoid these potential business financing complications.

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