A lot of our clients when asking for small business loans solution are wondering if it is possible to have small business loans financing product attached to a mortgage product, and if it makes sense to do this at all or not? There are advantages and disadvantages attached to this process. In this article we will discuss some of the strong and weak points in combining small business loan product with a mortgage product, and will give our prospective clients some advice on what to do with these both products.
For a lender, knowing that a client applying for a small business loan owns a residential or commercial real estate is a good thing. It shows that a client is capable to save enough money to purchase a property and run it, making all regular payments. This fact adds to covenant and covenant is one of the most important words when it comes to financing, especially unsecure business financing.
When it comes to applying for a small business loan, equipment loan, marketing or cash flow type of loans, it makes sense to combine it with a mortgage application in a case when such financing creates additional cash flow for Clients Company. As an example, if monthly occupancy costs will go down by 30% after purchasing a commercial unit, and there is a rental space as well that could add to monthly cash flow – combining a small business loan with a mortgage application is a great case of financial synergy. On another hand if financial result of such combination is not very evident, the likelihood that such application will get approved is little; creating a risk that small business loan application also will not get accepted. It is super important when making such a decision to consult with experienced business analyst practicing business financing and small corporate finance for years with 100’s of cases on which decision could be based on. This decision also will vary among lenders. Such lenders almost always offer unsecured business finance related products with commercial mortgage products, some banks never do, in this case experienced business finance consultant is an asset to have, to save time and money while in the process of financing.
The same story is on the other side of the apple. Some of our commercial mortgage clients have no idea that even though commercial mortgages are very narrowly regulated, in terms of pricing and leverage that could be obtained, very often with a good choice of commercial lender, the leverage on the real estate side could be greatly increased by applying for operating line or term loan from the same institution. Even though nothing can be done in terms of overall LTV (loan to value) the bank will lend on the mortgage side, an additional $50k-$100k in operating line given to the client on closing is extra money generally competitively priced that could be used for all small and medium sized enterprises very efficiently. After all for business owners with significant experience we don’t need to tell what to do with cheap money, since money creates money, and the more you have the more you can make.
Now for most small business loans programs that are available on the market in Ontario, there is a limit of $500k which could be used for both business purposes and real estate purposes. Our firm has ability to increase this limit to several million dollars assuming the company has strong financial history and the client has extremely good credit history. Also we specialize in putting together mortgage and operating line of credit combinations increasing the overall financing usually by $50k-$100k per every million dollar of mortgaged funds. Even though it might sound like not much, for a company purchasing $1.5Million dollar commercial unit in Etobicoke Ontario, the additional $75k we financed made additional $300k in revenue during the first year of operations on a new spot, which in turn paid back the original operating loan in full in less than 12 months. There are a lot of tricks that could be implemented when small business loan financing is combined with a mortgage, in many cases such a combination is not doable at all but when it works, good results could be achieved. As usually we advise all our clients to consult with us prior to starting any business financing initiatives. Having our knowledgeable associates in your corner might create financing opportunities you never heard of, making you a lot more money at the end.
Happy financing everybody!