Loan Types

Understanding Construction Financing

The United States economy relies on a healthy housing market. Recently, this market has seen a steady recovery from a real low period four years ago. Although the housing market has recently slowed down from its height, experts feel that it is basically strong. As a result, a large number of people are still anxious to build new housing instead of purchasing existing homes.

Getting financed for a construction project often requires more work than simply getting a mortgage for an existing home. Lenders assume more risk when they make construction loans versus standard mortgages. Borrowers also assume some risk that is not present with other loans. Before making the decision to build a new home, borrowers need to understand the construction loan process.

Types of Construction Loans

Lenders offer several basic types of construction loans: construction-to-permanent and stand-alone construction. When the borrower plans to act as their own contractor or build the house themselves, they may seek an owner-builder construction loan.

Construction-to-Permanent

With construction financing, the bank is loaning money for something that does not exist as yet. Home buyers need money for the initial construction costs, and then they need a mortgage on the home once it is finished. With a construction-to-permanent loan, the financial institution loans money for the construction, and then when the borrower moves in, they automatically convert the loan into a traditional mortgage.

Stand-Alone Construction

A stand-alone construction loan gives the borrower enough money to finish construction, but then the borrower must secure a mortgage to pay off the construction financing. They have to go through two separate processes, sometimes through different lenders. In this case, the mortgage is considered a “take-out” loan, a long-term loan that is used to replace short-term, higher interest financing.

Owner-Builder Loan

These loans are extremely difficult to get since the home buyer acts as their own general contractor. An excellent credit history, experience in construction, and a top-notch business and building plan are essential to securing this type of financing. Applying to a sympathetic lender is also recommended. Getting one of these loans is not impossible, but it will require a great deal of work.

Who Gets the Loans?

Construction loans may be given to the builder, the prospective home owner, or both. While some larger construction firms acquire their own loans to build homes, the buyer would, of course, need to secure their own mortgage. When a construction company undertakes an entire housing development, they may secure funding for the construction that contains a release clause, meaning they can sell a home to an individual buyer while the rest of the homes remain as loan collateral.
Smaller construction companies may not have this option. These loans are riskier for lenders, so they want to see a history of successful building efforts. In those cases, the individual borrower and not the company would take out the stand-alone or construction-to-permanent loan, leaving the builder out of the financing all together.

Loan Advantages and Disadvantages

A stand-alone construction loan works well for homeowners who need a smaller down payment, often because they cannot sell their current home until the new construction is completed.
This type of loan does come with some risk, however. The borrower cannot “lock in” their mortgage interest rate, so if the rates rise during the construction period, they may find their actual house payment considerably higher than they had planned on. If financial misfortune strikes during the construction, the borrower may not qualify for a mortgage when the time comes to apply.
Also, anyone who gets a stand-alone construction loan will have to pay two sets of closing costs and mortgage fees, which can be significant financial burden.
The construction-to-permanent loan has some clear advantages but can be much harder to get. Borrowers usually must make a 20% down payment. While they only pay interest during construction, that rate is variable, which means loan costs can rise significantly during the initial building phase.
However, borrowers are often able to lock in a favorable mortgage interest rate when construction commences, and they can get standard mortgage terms.

Loan Disbursement

Lenders do not release the funds all at once. First, they must examine the construction plans, and then they will release money in stages. During the process, they will have frequent inspections to make certain that proper progress is being made and that the money is being used correctly. When the inspectors are satisfied, the lender will release the next installment or tranche. This process can be a slow one, but it protects the home buyer as well as the bank.
Lenders have to protect themselves when it comes to construction loans since much of the collateral will not exist until a future date. As a result, they charge higher interest rates for the construction costs. For the home buyer, a construction-to-permanent loan offers the most security, but it will require an excellent credit history and a larger down payment. Stand-alone construction loans are riskier for home buyers but are easier to get and require less money for a down payment. They may be the best choice for large construction firms. As always, borrowers need to consult with financial experts before deciding the best loan/mortgage option to pursue.
November 26, 2018 / by / in
How To Raise Capital for an Early Stage Business

Introduction

 

Starting a new business or securing more finances to grow a startup can be an overwhelming task. The internet is full of businesses that are willing to loan money to entrepreneurs. There are even websites dedicated to connecting entrepreneurs with investors. Many of these business models require subscription fees or charge percentages of the funding secured in order to make their money.

 

While this is probably not the best way to go, there are dozens of other investors out there who are willing and able to help fund your startup, you just have to research what they require to fund your business. Knowing the different types of startup funding can be paramount when it comes to selecting the best way to raise capital for your small business.

 

All great titans in business started somewhere – Microsoft, Amazon, Apple, even IBM all have humble beginnings, starting in small garages with just a few employees, dedication, and a commitment to being the best at what they do. Many different types of startup funding exist for the many types of businesses. Not all of them are relevant to every business, but usually a new business has access more than just one type of funding.

 

One of the most important things to remember when securing funding for your startup or small business is that you want to solicit it from an accredited investor.  These are people or institutions that have higher financial profiles than the average Joe, who have great credit, and a certain degree of experience in the investing world.

 

When talking about sources of investment funding for small businesses, one business that comes to mind is Amazon, created by Jeff Bezos.

 

Friends and Family

 

In 1994 Jeff Bezos, a financial manager and computer scientist had an idea for a bookstore that would be do business exclusively on a new computer platform called the world wide web. He would call the bookstore Amazon, as in the amazon river, the largest and fastest river’s.  A suitable name for a company that would soon become one of the fastest growing in the world.

 

To start, Bezos was not without some small funding, but not a significant amount. It was true that the internet had gained some traction in wide scale adoption amongst consumers and with the advent of a reasonably priced computer system on the market, such a dream could possibly work – or be a complete flop.

 

Bezos would not be deterred and held a total of 60 meetings, with friends, family and investors. He pitched them the idea, which needed a great deal of explaining, and offered them each 1 percent of his business if they would invest $50K each. He managed to secure 22 investors at that time, and now two decades later those who would not follow him are scratching their collective heads. Today, this same 1% share of Amazon.com is worth about 7 Billion dollars.

 

This is the power of looking to friends and family for help with funding your small business. Not everyone has the money that Bezos had to start, or even the money his friends and family had, but his situation is a testament to the power of friends and family in business. While mixing blood and money is often not recommended, if you have strong roots for your business, and can convince friends and family to invest in your idea, it can be wildly successful for everyone involved.  The important thing is for people to not invest more than what they can afford at the time.

 

Funding from a unique source

 

Snapchat, the online photo sending app loved by millions of people across the world found an interesting way to build investors and create a winning IPO – schools and churches. In the early stages of development, Evan Spiegel CEO and Founder of Snapchat, approached schools and churches for small investments in a seed funding round.

 

Spiegel of course had quite the list of resources, having started with some of his Stanford professors and alumni, as well as some hefty funding from his parents who were successful lawyers in the Huntington Beach area in California. Nevertheless, the additional funding raised from churches and schools in the startup phase of their business helped to boost Snap’s capital pool early on, to make way for progress down the road.

 

These early investments netted those institutions millions in returns later as a result of Snapchat’s IPO. This really opens the door to funding, in early rounds, of a solid business plan that is already functioning and hoping to go public.  

 

Home Equity Funding

 

Sometimes, simply leveraging your assets can bring a business into the black, and offer a sharp return, especially if the business is already on solid footing, or has a strong model to work from. This is a tricky proposition for many people, but it can be done. The cash you can get from the equity in your property can spread payments over a long period of time at a very low rate and drop the interest rate to a more reasonable one than you might otherwise pay through private firms or lenders. The trick here is that equity fluctuates.

 

What your home is worth today, might change in a year or two. There was an influx of home equity drops in the later part of 2008, ruining finances and equity loans all over the country. Banks are more careful today, allowing the use of home equity less as a go-to option and more as a carefully thought out plan. Even in this paranoid financial market, taking out home equity loans to fund your small business or startup can be a safe and practical way to obtain early round funding without having to sacrifice stake in the company.

 

Government Grants, Loans, & SBA Loans

 

People mostly discount the government when it comes to resources for planning out a business funding round. The truth is, there are government grants for small business funding out there, but they have specific requirements that must be met in order to be awarded. The loan programs in at both the state and federal level are often times overlooked.

 

The federal government offers grants to nonprofits, educational institutions and local governments (state programs). These nonprofits, state, and local governments then offer funding for startups and small businesses through grants given directly to businesses through specific programs.

 

One of the few exceptions to this is the Small Business Innovation and Research Grants and the Small Business Technology Transfer Grants organizations. These grants have some specific requirements and business structures that must be met and carefully submitted. If awarded, businesses then gain funding by going through phases called funding rounds.

 

The Small Business Association has local branches throughout the country and offers loans to business owners in varying amounts. The SBA guarantees the loan to the lender, as a means to help the loan process. The maximum loan amount is $5,000,000 and of that the SBA guarantees 75%, which is $3,750,000. For loans under $150,000 the guarantee to the lender is 85%. The requirements are a personal or business credit score of 680 or above, a 10% to 20% down payment and collateral. Any loan that is $25,000 or less has no collateral requirement.

 

Angel Investors

 

Jeff Bezos, besides his family and friends, once received a $100,000 investment in his company from someone who just believed his company would do well. When that investor sought return for that investment it was worth about $240,000,000.00. That is a return that can be realized by an Angel Investor.

 

This small chance for massive returns is why some investors will invest “on spec” in a company that has no other guaranteed or realized return. Often times, Angel Investors may only be right on about 20% of their investments, while the other 80% fail. However, they do this in the hopes that these 1 out of 5 tat succeed yield a much higher return than the money lost in the Angel Investment funding of other startups.

 

These investors can be found, but there are a great many pitfalls as unscrupulous websites will charge fees for the supposed introduction to Angel Investors, for those in need of business funding.

 

The best way to approach this type of investor is through a website that offers face to face meetings, with the investor, at a predetermined time and place and only collects a fee for the meeting costs, such as a hall or room at a hotel. Some subscriptions are legitimate, but some are not. Careful research will reveal those introduction websites are worth joining.  

 

Personal Debit/ Credit Cards

 

Your personal accounts can help more than you realize. Taking out a line of credit in order to fund your business, or careful spending from a checking account can help your business secure much needed capital in the early stages of development. All the giants of business agree it’s the money you have, not the money you want, that makes the business work. Work within your means, have realistic goals, and success will follow.

 

When it comes to funding a business with credit or debit, be careful though. Interest rates on these cards are often as high as 20%, causing one $10,000 debt to quickly snowball into a formidable liability if not paid off right away or in a reasonable timeframe.

 

Personal Savings

 

This is very much inline with the debit and credit cards. A small savings account can get you up and running and working towards those all important funding rounds. A small website can get off the ground for under $1,000. And maintaining a retail or website subscription eCommerce site with some good advertising can be accomplished for under $100 per month.

 

Personal savings is definitely one of the safest ways to fund your startup or small business, provided that you have the funds to do so. It may not be as glamorous as securing seed funding, or taking out million dollar SBA loans, but it is equally a source of funding for a startup. For entrepreneurs who have the true succeed or die trying mindset, this is a strong option when first starting out to see if your idea and your passion behind it is worth the journey you are about to embark on.

 

Private Equity

 

Some companies just don’t want to become publicly offered. They receive capital investments and other funds directly from private investors in return for private shares in the company. These private investment firms are usually in the business of buying and selling companies and hold many companies in a portfolio.

 

They usually will require some control or stake in the company in return for their investment. The benefit to seeking investment from private equity firms is that they are usually very experienced in business, and will likely be able to provide much needed guidance to business owners on how to spend their funding, and how to make decisions to grow the company in the best way moving forward.

 

On top of this, because these investors have a direct interest in the success of your company through their stake in the company, they are more or less responsible for making sure that your business has the funding and the resources needed to succeed.

 

Business Incubators and Accelerators

 

Many times a college or municipality will offer a program whereby a small business or startup can receive help with many of the problems that affect them. These programs can offer space to work, some seed funding, training and other resources their larger and wider influence can provide.

 

Usually, these “business incubators” as they are called offer these resources to entrepreneurs starting small businesses for a fraction of the cost that normally would, and some even do it for free. Business incubators are a great way to secure funding for small businesses and startups because not only do they offer an environment to succeed and resources, they also offer expertise from people who have experience scaling businesses effectively, and assistance going through the various legal processes which businesses must go through.

 

Depending on where you are in the country, there are dozens of Business Incubators and Accelerators available to you. Some of the more commonly known business incubators are:

 

  • Y Combinator
  • StartX
  • Amplify LA
  • Capital Factory
  • MuckerLab
  • TechStars
  • 500 Startups
  • AngelPad

 

Reg A+ Funding

 

Regulation A+ is a type of offering where a private company is able to raise funds directly from the general public. A kind of IPO that doesn’t need or meet all the requirements of a formal IPO, which requires the investors to be accredited. These types of funding are meant for the smaller company or early stage business to raise up to 50 million dollars.

 

These types of funding are often followed up by additional, larger rounds of funding, which are subsequently called Reg B, C, and sometimes D funding.

 

Usually by the time a business gets to Reg D funding, investors are itching for a final product delivery, and a promise for some returns on their massive investments. By this stage, it is usually make or break for businesses to either push towards profitability or a selloff event in which investors can receive back compensation in return for their investment stake in the company. This can come in the form of being bought out, holding an initial public offering (IPO), or liquidating assets accumulated by the company over time.

 

Reg A+ funding is a great way for small businesses and startups to secure funding that is much needed in the process of developing their company. However, it is likely the best model for very specific businesses that have the opportunity for scalability and widespread national or global adoption, due to the need for returns to investors within a given timeframe, and the massive amount of funding that they put forward.

 

Business Funding Competitions – Techcrunch

 

Although shrouded in controversy, business funding competitions are a big part of TechCrunch’s culture. TechCrunch is an online magazine, and resource for all types and forms of business. This company has a well regarded contest for startups called Startup Battlefield. Startup Battlefield offers startups from around the world the chance to compete for the Disrupt Cup and $50,000.

 

With the exposure from media and investor firms the winners and even the runners up stand to gain ground in their funding efforts. There are many contests out there, many of them offering prizes from $10,000 – $50,000.

 

This type of funding for small businesses and startups is gaining widespread popularity around the world, and other business competitions are beginning to pop up as a result.  Not only do these competitions offer a way for business owners to secure funding, but they also offer an atmosphere of fun, knowledge and progress to entrepreneurs who want to change the world.  Even if you do not win the competition, these events can be great for networking and learning more about the business opportunities around you.

 

Some other business competitions that offer funding to business owners are:

 

  • Rice Business Plan Competition
  • Harvard Business Plan Competition
  • MIT $100K Entrepreneurship Competition
  • Tufts 100K Plan Competition
  • Duke Start-Up Challenge
  • New York StartUP! Business Plan Competition
  • 2017 U.Pitch Competition Competition & Showcase
  • Hello Tomorrow Challenge

 

Customer Financing (Advance Payments)

 

This is the type of funding sources companies like Apple have been using for years. They push the advertising, word of mouth, and the reputation of their past products to get customers to purchase products before they are made. Many car manufacturers such as Tesla also use this method to bring in clientele based on the desire to have a chance to be the first to have a new product line.

 

If you have a great existing customer base that believe in your vision, this can be a great way for business owners to secure funding. You want to be careful though, as not coming through on your promises can quickly lose customer trust and interest that took years to build.  It’s not exactly easy to win back either.

 

Crowdfunding

 

This method of raising capital has some very good results. GoFundMe is probably the most well known of the crowdfunding organizations. The website will tell you and also help you to advertise your need on social media, with family and friends. Ambitious entrepreneurs and successfully crowdfunded business managers will tell you, getting the link out onto websites of all types is the way to winning numbers on the bottomline.

 

Some other popular crowdfunding sites that business owners can use to secure financing are:

 

  • Kickstarter
  • Indiegogo
  • Patreon
  • Ulele
  • CircleUp
  • Rockethub
  • GoGetFunding
  • DonorsChoose
  • GiveCampus
  • Fundly

 

Venture Capital

 

Venture Capital is a form of funding where businesses are funded by a firm or bank that specifically lends money (usually millions) to businesses for a stake in the company.

 

This form of funding is not usually for the startup business venture. Not to say a good pitch can’t get you VC funding, it’s just that the investment banks that do this type of funding are more in the market for larger companies that they can take control of. Venture capital can be a very attractive alternative to businesses that have already been working a few years with existing revenues, proof of concept, and that have a strong projected earnings potential.

 

To the enterprise business owner, or startup managers, funding can be daunting and challenging. But with some background work, there can be a future for the company that would like to get off the ground and grow within its chosen market.

 

Securing Funding for Your Business or Startup

 

When it comes to securing funding for your business, there are many options available to you. Each has their own pros and cons which may make them better or worse for your business, depending on your existing business model.

 

Regardless of industry, there is always a form of funding for businesses that is a viable solution to your lack of capital. The best tip we can give before securing funding for your business is to make sure that you have done your research, and compared the various types of startup funding available to you in order to make the best decision.

November 21, 2018 / by / in
Basics of Fix and Flip Loans
Due to a number of popular television shows, most people know the premise of buying and flipping properties. An investor acquires a fixer-upper, makes the necessary improvements and, hopefully, sells it for a big profit. In 2017, the average profit on a flipped house was $63,143, which means the practice can certainly be a worthwhile investment. Financing for these purchases can be complicated because traditional mortgages are generally not an option, especially for those flippers who are just starting out. Other traditional loans also take a lot of time to acquire and generally rule out anyone with less than great credit. Fortunately, those people wanting to get into the flipping business do have a number of other financing options.

Why a Fix/Flip Loan?

Getting enough money to buy and renovate a house can be a big challenge. Most lenders want to keep the LTV, loan to value ratio, below 80%, meaning borrowers will need to come up with a 20% down payment. For commercial real estate, the LTC, or loan to cost ratio, is considered. That simply means the ratio of financing to the construction cost, which most lenders want to keep below 80% as well.
The houses involved in a fix and flip are obviously often not worth much as is. They need extensive renovation. That’s why flippers need a lender who will consider the homes ARV, after repair value, which should be a substantial improvement. Traditional loans are usually based on the property’s current appraised value, so those lenders prefer properties that are already in good condition. That’s why those who want to fix and flip usually need to look elsewhere for their money.

Types of Fix/Flip Loans

These loan options are often an excellent way for they buyer to make money, but they do come with heightened risk and higher EBC, effective borrowing costs, the total cost of borrowing which includes appraisals, origination fees, loan fees, etc.

Hard Money Loan

These non-bank loans are a popular option for buyers who plan to quickly sell a property after buying and renovating it. In general, these loans, also known as rehab loans, are easier to get than traditional loans, and they are fast. Borrowers can sometimes apply for and receive their money in approximately two weeks. If the property has enough potential, lenders will work with people with credit issues.
Drawbacks of these loans include higher interest rates, usually between 10% and 20%. Buyers will often pay higher fees as well. The loan is short-term, meant to last for approximately a year. Borrowers can also expect their lender to release the money in partial payments so they can make certain renovations are being done correctly and on time. The home buyer sacrifices some control with this type of loan.

Home Equity Line of Credit

Some people use the equity in their own homes to secure an HELOC, which means using residential assets for a commercial endeavor. The bank allows them an amount based on the home’s equity, or amount that they have paid for, versus the remainder of their mortgage. The money is available, but the homeowner may use some, none, or all of it. For those with at least 20% equity in their home, this option may work, especially since they only pay interest on the money that they actually use.
The interest rates on these loans are favorable and lower than many other loan rates. Banks will let owners borrow up to 85% of their home’s value minus the balance of the original mortgage.
Since the borrower’s home is the collateral for this loan, they can lose their primary residence if they cannot keep up with the payments, so an HELOC should be carefully considered.

Financing Partners

Often, one person brings the construction and market expertise and another brings the financing. Established flippers may be able to bring on a financing partner who brings the money for the purchase and the improvements. While entering into this agreement, the partners decide how the profits will be divided, which usually depends whether the investor provides more than the money. If a home sale is profitable, everyone is happy. If not, they divide the loss according to the previously determined percentage. The flipper can end up making a healthy profit or be responsible for a significant loss.
Other financing possibilities include investments from family and friends or acquiring a personal loan. Some people even tap into their retirement funds. All of these options carry risk as well as the possibility of reward. No buyer should bet everything on a flip project.
Fix and flip loans differ from traditional financing in a number of ways. Borrowers need a loan that can be processed quickly, unlike traditional mortgages, which can take months to finalize. They are usually a short-term loan, and a borrower’s credit history is less important than the real estate’s profit potential. While these fix and flip loans are more flexible, they also have higher interest rates and often carry more risk as well as lender involvement.
Obviously, flippers with a successful history have access to more financial options, but beginners can break into this market. As always, people should seek professional financial advice before beginning the borrowing process.
November 20, 2018 / by / in
Business & Real Estate Loans in the Adult Entertainment Industry

Many banks and lenders have restrictions when it comes to certain industries. In this article, we outline some of the ways in which businesses may be affected by this, if they fall under any category in the adult entertainment industry.

What Types of Industries Could be Restricted?

A restricted industry is a general name for many industries that may not avail of an institution’s services.

In the adult entertainment industry, this could be anywhere from online sex toy shops, to an adult video producer’s line of work. Massage parlors and exotic dance clubs often fall under the restricted industries category.

There is a long history of adult performers having their personal bank accounts shut down without forewarning. It is not limited to smaller lending business, either. The most common cases happened with major financial institutions: JPMorgan Chase, Bank of America, and American Express.

In the eyes of the above-mentioned banks, the adult business cannot obtain the same loans and financial support as other businesses.

For the new adult business owner, this could be a surprise. Getting a loan for a startup fund may be difficult. Even processing payments may have to be handled differently. Paypal is a big name that still prohibits adult industry transactions.

How to Know if You Will Be Able to Request a Loan

It can be difficult to determine from a lending firm or bank. Look for specifications regarding “morality clauses”. These are often a wide range of industries that are still considered taboo. The adult industry is not the only one; other businesses that may be restricted are marijuana companies and weapon sellers.

Those who have ever experienced difficulty getting a loan because of their work in the adult industry should not lose hope. This is simply an obstacle to be overcome.

Anyone who goes into this business and must make financial transactions should acknowledge two facts:

1. Many lenders and banks have moral objections in regards to the adult industry

2. Many folks who work in the adult industry have made financial decisions that put negative implications on everyone else in the business

That being said, there are still ways to get a mortgage for an adult industry business, complete with good rates.

Evidence and Documentation

One of the most important aspects is being in a good financial position. Those who apply for loans must have existing assets. This means being able to prove to the lenders that they have funds to support or pay back a loan.

Documentation should always be prepared. Supporting documents which can prove regular income from an industry, plus proof of larger deposits can usually secure a good business loan.

To secure a loan with an excellent interest rate, a mortgage expert must be consulted.

How to Prove Income in the Adult Entertainment Industry

There are many regulations for nationwide and international banks, put there to minimize illegal discrimination. Legally, no financial institution has the right to deny anyone a loan based on race or color. Same goes for health or disability issues, gender, and religion.

Yet since those regulations do not specifically prohibit adult-industry based discrimination, many in this industry are often wrongly categorized and denied the loans. Unfortunately, it is the small businesses and startups that are most hurt by the policies.

It is, however, a reality that many customers in the adult industry demand refunds, such as in the case where a credit card is used, and the one responsible denies any association with the adult purchase in question. This leads to many financial institutions denying accounts to anyone in the adult industry.

JPMorgan Chase once refused to underwrite a loan, simply stating “moral reasons”. When the client tried to refinance an existing loan, the bank stalled for months, without reason.

Using professional names for bank accounts

One thing we often see with those in the adult entertainment industry is that most of the financial issues are tied to business accounts—not personal ones. This happens in the case where a client uses their industry name or pseudonym when opening a bank account or applying for a loan.

This backfires, however, because it is often times that very pseudonym that is more known in the adult world. And of course, there is the occasional online research a suspicious lender can always do when making background checks.

Finding Real Estate and Business Loans for Your Needs

While preventing serious illegal activities or money laundering is a real concern, adult businesses should not be censored just because someone in the firm has a “moral” concern.

We have even been seeing that this kind of censorship does not prevent folks from doing business. They will simply find a way around it. Bitcoin and other cloud payment options are now becoming more popular, because of this very reason.

LenderMatrix.com–We match you with providers in your area and ensure you get the capital needed to fund your goals. If you need someone who specializes in business and real estate loans and has perfect funding solutions. Start your search today!

November 18, 2018 / by / in
How to Find Funding for Your Startup

Owning a businesses is part of the American dream. Someone comes up with a wonderful idea, produces and markets it, and becomes rich beyond their wildest expectations. While some businesses, such as Apple, are excellent examples of this dream, for most people the reality is less glamorous. However, startups can still be quite successful.

For any startup venture, finding funding is a major concern. No matter how great the idea or product, traditional banks are not going to fund it on the mere hope of future returns, especially since more than 50 percent of small businesses fail in the first four years. Of those businesses that do fail, 82 percent do so because of cash flow problems. That’s why entrepreneurs have to seek reliable sources of investment money elsewhere.

Venture Capital

Venture capital is simply financing from investors looking for companies that can provide a good, long-term return on their investment. This type of financing can come from individuals, investment banks, and other sources. The risks are high for these investors, but they can also reap excellent financial benefits. In return for this funding, the investors usually receive equity in the company, which means they have some decision-making power in the business.
Finding venture capital for startups is a popular but competitive choice. Also, many venture capital sources prefer to invest in tech companies, so those startups not in that realm may need to seek funds elsewhere.

Angel Investors

Finding an angel investor is another way to fund your startup. They are generally individual investors looking for profits of 25% or more on their money. In return for providing financing, they usually receive a equity position in the company.
An angel investor provides startups with the cash they need without forcing them to incur debt. If the company fails, the angel investor does not have to be paid back. However, the business owner does lose some control of the company, something that does not happen with traditional debt financing.

Business Incubators

Business incubators are organizations that work to help startups and new businesses launch and become productive. The incubator members offer connections to various types of funding and also offer business guidance. They involve themselves with the business plan and work to help the companies grow. Collaborating with an incubator offers some solid benefits, but entrepreneurs may lose a bit of control over the company vision if they go with this source of funding too early in the process.

Crowdfunding

Crowdfunding is still a viable option for some startups. Kickstarter, Indiegogo and others have helped launch some extremely successful companies, including Elevation Lab and Bragi. These companies raised millions with their crowdfunding campaigns, while backers receive no financial return. Instead, those that contribute to crowdfunding usually get special updates or other incentives that make them feel a part of the creative process. The crowdfunding platform receives a small percentage of the funds.
The competition for crowdfunding is now intense, so a startup has to work hard to capture the imagination of potential backers. It the idea isn’t sexy, backers will overlook it.

Small Business Grants

The Small Business Administration and some other organizations offer small business grants to certain groups or project types. Startups by minorities and women are eligible for some of these funds, which generally do not need to be paid back. Certain types of projects, such as broadband for rural communities, may also be able to secure these funds.
Getting these funds is a long and competitive process, so entrepreneurs must measure the time it takes against the potential benefits of the grants.

Family and Friends

Getting startup money from family members and friends has its advantages. These people are already disposed to believe in the business owner and want them to succeed. The terms of these loans are often quite favorable, with only modest returns expected on their investment.
To protect everyone, these loans need to be official, with each party concerned receiving proper legal counseling before signing the papers. Even so, taking money from friends and family can cause hard feelings, particularly if the business fails.

Self-Financing

Many people finance at least part of their startup needs by “bootstrapping,” which involves using their own money. They may use their savings, their retirement funds, a second mortgage, etc. to get their new business off the ground. In fact, some people put all of their financial resources toward financing their dream.
Of course, self-financing can be quite dangerous since so many startups fail. The business person can end up with no company and massive personal debt.
While some startups take off, making their founders and investors a significant amount of many, many fail in the first few years. This risk makes acquiring startup financing challenging, but finding investors can be done, particularly for exciting and innovative ideas. While those in the tech field have an advantage in the venture capital area, others can secure financing in alternative ways, including through grants, angel investors, incubators, etc.
Whenever possible, startups should look for outside funding. Finding this funding can be a long and frustrating process, but it greatly lowers the risk to the startup founders.
November 11, 2018 / by / in
Hard Money Loans 101
Sometimes a traditional mortgage or other bank loan does not work for a particular business. Real estate investors often need alternate forms of financing to fund their renovation projects. Many turn to hard money loans, which are non-bank loans used by real estate investors who buy fix and flip properties. These loans offer fast money and require fewer borrower qualifications than other financing types to these investors, allowing them to complete their projects in a timely manner and profitable manner. Hard money loans do offer fix and flip buyers a number of advantages, but they also offer them some challenges.

Hard Money Basics

People turn to hard money loans because they are fast and require fewer buyer qualifications. When buying flip properties, buyers have to move quickly to beat out the competition. Traditional loans can take weeks or months to close. Banks also hesitate to lend money for properties that are not already in excellent condition since they only consider the current worth of the property. Flippers need lenders who consider the ARV (After Repair Value) since their aim is to buy properties that are in disrepair, fix them and then sell them for a significant profit. A loan for a majority of the purchase price is simply not enough.
Hard money lenders take a different approach toward borrowers as well. Credit scores are not as important for them as they are for a bank. A hard money lender bases their acceptance on the collateral for the loan, the property itself, and not the borrower’s personal finances. If the borrow cannot repay the loan, the lender simply takes the property.
Getting a traditional loan can be a long and grinding process. Hard money loans can be processed in two weeks or less and are for a shorter term than traditional mortgages, usually one to five years. That loan period usually gives the buyer enough time to finish renovations and sell the property, hopefully at a big profit.

Advantages of Hard Money Loans

Hard money loans offer borrowers a number of positive aspects. Real estate investors consider the speed of the process a major advantage of these loans since time is literally money for them. The faster the flip is finished, the more money they should make. Also, people with credit issues can receive financing that wouldn’t be possible through regular loans. The emphasis is on the property’s worth and the buyer’s expertise in the field.
Staying current with a hard money loan is easier than with traditional financing. During the duration of the loan, borrowers only make interest payments and do not repay principal until the property is sold or they secure other financing.

Disadvantages of Hard Money Loans

Hard money loans are costly, usually charging interest rates that range from 7% to 12%. Currently, traditional home mortgage rates are between 4.25% and 4.5%, significantly lower. Also, hard money lenders often charge steep lender fees, up to 10%. The borrower can afford these terms if their renovated property sells for a high enough price. If the property does not sell quickly, the costs can become unsustainable as a long-term expense.
Borrowers may have less power with these loans. Hard money lenders keep firm control of the money and dispense it in a series of payments at predetermined times. Sometimes this schedule leaves the borrower short on funds to continue the home rehab between payments.

Other Hard Money Borrowers

Fix and flippers are the most common hard money borrowers, but buy-and-hold investors may also use them. These buyers want to buy and renovate a property as a long-term investment and not just to fix and flip. Banks often will not lend them the necessary money because the property is not in good enough shape to justify the loan. In that instance, they may seek a hard money “rehab” loan. Once the borrower has renovated the project, they can then refinance their purchase into a permanent loan, rent out the property, and pay back the hard money loan. In this instance, the hard money loan serves as a bridge to traditional financing.
Hard money loans serve an important purpose in real estate transactions. They are a simple way to secure financing for flip and fixers when traditional loans aren’t available or simply do not make sense for the project. These loans are flexible, fast, and relatively easy to get since they rely on the property’s ARV instead of its current value. For real estate investors, they are a go-to method to finance their projects, which are often quite profitable. In 2017, house flippers made an average profit of $68,143 per unit, which is why the practice is still popular.
These loans do have limitations, including a high cost, particularly when compared to regular bank financing. The interest rate and initial fees will take a chunk out of future profits on the project. If something goes wrong with the rehab, the borrower can lose a significant amount of money. House flippers should explore all their options before taking out a hard money loan. In some instances, less expensive financing methods are available to the property buyer.
November 11, 2018 / by / in
SBA Real Estate Loans: What You Must Know
The United States Small Business Administration works with local lenders to give small businesses the affordable loans they need to operate. They have a number of loan programs to meet various business needs, including loans that cover real estate purchases. Borrowers will find it easier to be approved for an SBA loan than a regular bank loan and also enjoy better terms. This loan program also benefits the community at large, which enjoys a more robust local economy as a result of these programs.

SBA 504 Loan

This loan is for commercial real estate that will be occupied by the borrower. The 504 Loan program has concrete advantages for both lender and purchaser. The borrower gets a low down payment, usually just 10% of the total project cost. The loans range from $125,000 to $20 million and are for 20 years, though borrowers could apply for a 25-year loan beginning in April 2018. These loans are at a lower fixed rate, which keeps the monthly payments low and more affordable. Also, no outside collateral is necessary, although personal guaranties by the borrowers of 20% or more ownership are required.
Since the loan is a 40% SBA CDC loan (certified development company program) and 50% bank loan, the lender assumes second position, meaning they incur far less risk than with other loans.
The government does impose certain conditions on these loans. The 504 loan must be used for one or more of the following:
  • To purchase an existing building
  • To acquire land and then construct a new building
  • To expand an existing building
  • To finance building improvements
  • To buy equipment
To be accepted for this loan, the borrower must have 51% occupancy for an existing building, 60% occupancy for new construction, and purchase equipment with a minimum 10-year economic life. The business net worth cannot exceed $15 million, and the average net profit after taxes for two consecutive years must not be more than $5 million.

SBA 7 (a) Loan

This loan has much in common with the 504 but differs in some significant ways. Unlike the 504, the loan structure is negotiable and additional collateral is necessary. In addition to the assets acquired by the financing, a pledge of the borrowers’ personal residence may be required. Both loans do demand personal guaranties by the borrowers of 20% or more ownership.
The program requirements are similar, but with the SBA 7, all assets financed by the loan must be used to the direct benefit of the business.
The loan can be used for the following:
  • To expand, buy or start a business
  • To purchase or construct real estate
  • To refinance business debt
  • To buy equipment
  • To provide operating capital
  • To purchase inventory
  • To make leasehold improvements
This loan requires a 10% minimum down payment and is for businesses with annual sales of no more than $750,000 to $33.5 million for retail, service and agricultural businesses. The company must have between 100 to 1000 employees if it is a wholesale or manufacturing concern. The net worth allowed is determined by the industry type.
The interest rate is adjustable and the loan length is 25 years, generally making the 7(a) more expensive than a 504 loan, in part because the loans are sometimes more risky for the lender. The fees for these loans can be significantly higher than for the 504 and the maximum loan amount is $5 million.

Which is the Best Loan?

The 7(a)offers more flexibility as it can be used to borrow working capital as well as used for a real estate and business purchase. The 504 cannot be used for a business purchase or for working capital. Buying commercial real estate with the 7(a) is more expensive than using the 504, however. Also, there is more personal risk with the 7(a) since it usually involves using personal residences as collateral. If partners are involved in the purchase, the one with more equity in a home will carry more of the financial risk.
The 504 scares off some borrowers because it involves two lenders, and they fear the paperwork will be endless. In fact, most borrowers do not find that to be the case. In some incidences, completing the 7(a) takes longer. Also, the 504 comes with a prepayment penalty, but in most cases, the fees for the 7(a) still make it a more expensive loan.
Many lenders steer their clients toward the 7(a) since its more convenient for them and may be more profitable. For many clients, the 504 actually makes more sense.
For investors wanting to build or buy an existing building or business, one of the two SBA real estate loans might fit their needs. Borrowers may certainly consult with their current lender, but further investigation may be needed to find out which loan will work best for their particular situation. Both loans allow borrowers to get funding that might be out of their reach without SBA help. Lenders like both loan programs, in part because they face less risk from their loans. Current and future business owners can all benefit from these consumer-friendly financing programs.
November 11, 2018 / by / in
Mezzanine Loans Made Simple

Buying commercial properties is often complex, requiring reams of paperwork and huge financial commitments. A simple down payment/mortgage situation may not be possible, in part due to the millions of dollars that are involved in huge commercial real estate transactions. To get the deal done, big borrowers often need the help of a mezzanine loan.

For those not in commercial real estate, a mezzanine may conjure up a picture of that “extra” level that is located between two main floors, often at a theater or concert hall. While these mezzanines are two different creatures, the building description can be applied to the loan type as well. These loans function somewhere between debt and equity, the two main financial floors, making them an important step in financing commercial real estate. Instead of a claim to part of the real estate project or other property, the lender takes company stock as collateral.

Who Uses Mezzanine Loans?

Not everyone can use this type of financing. In general lenders will only provide it when the company involved has an impressive history of quality and profitability. In addition, lenders want to see sound expansion plans from the company that demonstrate growth potential. In short, you need to be an established industry player to get one of these loans.

Mezzanine loans are generally for large amounts, usually around $10 million. In fact, most of these lenders will not make a loan for under $5 million. Preparing these loans is labor intensive, so lenders are reluctant to spend that much time on loans smaller than that. Larger businesses and corporations are almost always the customers for these loans.

Experts say that there are several types of lenders for mezzanine loans. Business people who are planning new construction often apply for them, primarily because commercial construction lenders often demand that the borrower come up with 40% of the construction cost, a hefty amount in most instances.

Also, a borrower may want to “pull out” equity from a property that has grown in value. The terms of the first mortgage may make getting cash from refinancing difficult. A mezzanine loan will allow the borrower to receive some desired capital.

How Do Mezzanine Loans Work?

A mezzanine loan usually carries an interest rate somewhere between 12% – 20%, while the average 2018 commercial real estate loan interest rate is around 4%- 5%. These higher rates carry some risk for the borrower and possible healthy returns for the lender. It functions a little like a second mortgage, but instead of using a property as collateral, a company uses stock in its company. Suppose a buyer is after a $100 million property. They get $75 million traditional financing and agree to put up $15 million of company money. They may be able to get the remaining $10 million through a mezzanine loan, which reduces their capital investment and allows them to move forward with the purchase.

Pros of Mezzanine Financing

One obvious advantage is that companies do not have to come up with as much cash during an acquisition when they use this form of financing. Mezzanine debt is also tax-deductible, which is extremely attractive to borrowers. They can also include the amount of interest they expect to pay as part of the loan balance.

These loans come with a great deal of flexibility as well. When borrowers cannot make an interest payment, their lender may defer some or all of that payment, something that does not often happen where other loans are concerned.

If the company “takes off” after the acquisition, it will grow in value, often quite quickly, allowing management to restructure their mezzanine loan into a traditional loan that comes with a lower rate of interest.

Cons of Mezzanine Financing

Mezzanine loans do come with some drawbacks. For instance, the lender can foreclose on them quite quickly. If the borrower does not make a payment, the lender can foreclose in a mere five weeks as opposed to approximately 18 months to foreclose on a mortgage. While this is a disadvantage for the borrower, it certainly makes life easier for the lender. In fact, the lender can end up owning all the stock of the borrower’s company and perhaps claim ownership of the investment property.

In the case of these loans, the borrower’s investment ranks after the primary investor and the mezzanine loan, meaning they can rather easily lose their entire investment if things do not go well.

Mezzanine loans allow big borrowers with an excellent financial history to reduce their initial capital investment and possibly increase their rate of return. Often, coming up with the required investor portion of a mortgage can impose too great a burden on a company, impeding its ability to function as it needs to during its day to day operations. If the property investment prospers, the borrower can often convert the mezzanine loan into a traditional loan, thus reducing the high rate of interest and saving the business a significant amount of money.

These loans are also somewhat risky and come with a high rate of interest and a quick foreclosure period. In some cases, the lender ends up owning the company.

For those borrowers with big projects, a mezzanine loan may be the best way to go, particularly if they fully understand the potential risk/benefit ratio.

Search for Mezzanine Loans on LenderMatrix today!

November 8, 2018 / by / in
Cannabis and Hemp Industry Loans

The cannabis and hemp industry is no longer an underground enterprise due to changes in state laws and the acceptance of marijuana as a medical treatment and recreational substance. While growing and selling these plants is still illegal in some areas, in others, it has become a profitable and aboveboard business. Since legal issues do still exist, financing these businesses can be tricky, but several financing options do exist.

Cannabis and Hemp Basics

The overall cannabis market is expected to hit $25 billion by 2025. The market for hemp-derived cannabidiol (CBD), a product touted for its medical uses, should hit $1 billion by 2020. The entire industry is booming, in part because the medical community has started to embrace the health benefits of both hemp and marijuana.

The legal landscape has changed as well, with states like California and Colorado completely legalizing these substances. Other states such as Illinois have made medical marijuana legal and decriminalized recreational use. States such as Texas, Oklahoma and Kentucky still make cannabis and hemp use illegal for any reason.

The federal government also considers their use a crime, but under the Obama administration, state laws were recognized and federal law enforcement did not intrude. Current Attorney General Jeff Sessions seemed poised to enforce these laws, but the Trump administration has since backed off this stance, much to the relief of those in the industry. However, this contradiction between state governments and the federal government makes acquiring funding for cannabis and hemp production and sales more difficult.

Financing Options

For those who want to break into the industry, getting a bank loan is highly unlikely. Most banks are insured by the FDIC, or Federal Deposit Insurance Corporation. The FDIC will not insure any bank that loans money to companies that break federal law, so that eliminates the entire cannabis hemp industry. Some FDIC banks will loan money for equipment since that is a step removed from the actual product. Fortunately, those interested in the business can secure other forms of financing.

Hard Money/Private Investors

Some private investors actually specialize in cannabis and hemp hard money loans as well as other high risk ventures. Collateral for these hard money loans is based on the real estate in question and not on the borrower’s current financial status. The lenders will set some borrower qualifications, although these will be less stringent than a traditional bank’s requirements. In general, hard money lenders are a source for business owners who cannot get regular funding due to poor credit scores or those engaged in a controversial enterprise such as cannabis.

Those using hard money loans to start their business should expect to pay their lenders significantly higher interest rates, well over 10%, and have a short term to repay them, usually a year or two. At the end of the term, the loan must be repaid or other financing secured. Until the balance is due, the borrower only makes interest payments, which is a significant advantage for borrowers. The short-term nature of the loan is often sufficient to launch a business start-up.

Some private investors deviate from this formula and provide start up money in exchange for part ownership. In most of these cases, the borrower retains the power over day to day operation decisions, a long term arrangement that can benefit both parties. This arrangement also gives the borrower more time to make the business profitable.

In both instances, the loan application process should be fast and efficient, taking less time than a bank’s more complicated procedure and allowing the business to begin operations quickly.

Niche Business Loans

Niche business loan companies are another option for small businesses in general and cannabis entrepreneurs in particular. These loans frequently work for those who cannot get bank financing and need quick access to their funding. Like most financing options, using one of these companies has both advantages and disadvantages.

Applying for these loans is extremely convenient and can be done from home at any time. Also, when borrowers provide their financial information, they are making it available to a number of lenders, but their credit score doesn’t suffer since only one source is accessing their credit report.

Borrowers also are able to compare all of their options at once and find the best terms possible, reducing their loan costs.

The major disadvantage is the interest rate. Like hard money loans, the rates are significantly higher than bank loans. Also, these loan companies are relatively new, so they have a higher chance of failing than other, more established lenders.

For those entering the cannabis/hemp business, online business loans may be a good option. However, the interest rates and other terms range widely with these companies, so borrowers need to carefully research the loan before signing any loan contracts. They should also check out the company’s reputation and history before entering into any agreements.

The cannabis/hemp industry is thriving and promises investors a healthy return on their money. Since there are federal legal issues, finding financing can be complicated. Most banks will not loan money to borrowers for this purpose, so they will need to turn to private investors, hard money loans, and home equity loans. In some cases, private investors will assume part ownership in return for their money.

The federal government has shown recent signs of softening on this issue, so borrowers may be able to acquire bank loans in the not-too-distant future.

Search cannabis and hemp property and business financing options on LenderMatrix by using the property type or business industry search filters.

 

CLICK HERE TO SEARCH CANNABIS/HEMP REAL ESTATE LOANS

October 1, 2018 / by / in
Fundamentals of Conduit Loans in Commercial Real Estate

All borrowers must look into a number of types of loans on the market. Here is a rundown of CMBS or Commercial Mortgage Backed Securities Loans, most commonly used for commercial properties.

Those who hope to be real estate owners can secure this type of loan from either banks or conduit lenders. Anyone who wants to understand CMBS conduit loans must first understand their structure.

How Conduit Loans Work

In the beginning, commercial mortgage-backed security loans appear like traditional loans. However, the difference is that these loans are placed in a trust where investors can purchase bonds.

Once the loan has been paid off, those investors are able to receive returns on their investments. CMBS loans can be a great way to finance a commercial property. Investors can choose purchases and pick which CMBS securities to buy in view of the level of credit best suited to them.

Who uses Conduit Loans?

CMBS loans are most commonly used when setting up Commercial Real Estate properties. The stakeholders are usually from the hotel and servicing industry, medical professions, retail, storage, or office businesses.

Commercial real estate investors seeking non-recourse loans are most likely to use a CMBS, as it can be secured by a first-position mortgage on a commercial real estate property.

What are the Pros of Conduit Loans?

A Commercial Mortgage Backed Securities Loan can be ideal for saving upfront fees and broker fees. As opposed to a traditional mortgage, a conduit loan is that it often is priced between 1.75% to 2.25% over the local interest rate.

On the upside, CMBS loans can sometimes be more flexible than conventional or agency loans.

What are the Cons of Conduit Loans?

Some CMBS conduit loans criteria are strict, so business owners must decide whether it is for them. If a business is unable to refinance the loan, it will end up being much costlier in the long run.

Prepayment is often complicated, because of penalties and the multiple investors involved. Many CMBS loans are amortized at 30 years, with fixed interest rates.

How to Choose the best option for a real estate loan:

One way that real estate owners can determine the best course of a transaction for the property is to look at the interest rates of conduit loans, taking into consideration their long-term goals.

If an owner borrows a loan, he or she cannot easily sell it, and so getting additional financing on collateral may be complicated.

Finalizing a loan takes time. A good way to get information on all options is to sit down with a mortgage specialist and ask for answers in rates and numbers. Ask questions such as initial costs, long term interest costs, loan sizes and locations.

Take time before you finalize a loan to really understand the pros and cons of CMBS conduit loans. Discuss the options with a mortgage specialist to be fully see the numbers both in the short-term transactional fees and the long-term interest costs.

What Should be considered before closing a conduit loan?

If a borrower is not properly informed of CMBS servicing terms, rules and regulations, then processing these type of requests can be time-consuming due to applicable loan documents and all bondholders.

Here are some common Conduit Loan feature terms to be aware of when signing documents:

  • Term Length/Amortization: CMBS Loans usually have terms from 5-10 years. Typically, a loan “balloons” at the end of the term, and the balance must be paid off.
  • Non-Recourse: This is when Borrowers are not personally liable for the repayment of the loan, unless the Borrower has directly caused the property harm. Yield Maintenance and Misfeasance Penalties: These structures create monetary penalties, so therefore, a borrower should consider markets and hold time. Yield maintenance is based on the value of the difference between the conduit loan’s interest rate and current rates of a conduit loan. The terms are usually 6 months less than the actual conduit loan term.
  • Loan Assumption: This is attractive, normally in high-interest rate environments. It is when the Borrower decides to sell the commercial real estate with which they secured the CMBS Loan. After the sale, they are now the purchaser and are bound by the original terms of the loan. All other borrowers or sellers are hereby exempt from property obligations.

The Conduit Lenders Role

Borrowers seeking the best interest rates on commercial loans should contact Conduit Lenders. They take the stress and complication out of financial deals. It is up to the lender to book the loan, review all the fine details and compliances, then sell it to an insurance company.

Working with Conduit Lenders is ideal if the borrower expects the following:

  • Fixed rates or long-term loans
  • Guaranteed return on investment
  • Guaranteed exclusion of second and third loans on the commercial real estate
  • Guaranteed fixed loan terms. (Absolutely no changes)

Which type of loan is best?

The answer always follows the needs of the clients. Both borrowers and lenders must look at a property’s current and future potential. The should consider the capital necessary, changes in the economy, and goals for the commercial space.

For more information on real estate loans, commercial loans or business loans, visit  www.lendermatrix.com where you can search and compare 1,000s of lending options.

September 30, 2018 / by / in