As a commercial broker, you realize it is not all about the rate. Your clients may think it is, and of course they want the best rate possible, but it’s important to keep the focus on the best solution for their particular scenario, not the lowest rate. By understanding the factors that affect rate, you can help clients understand the trade-offs and set expectations to keep the emphasis on the most valuable solution versus rate alone.
Small business owners applying for a commercial loan with banks are often rejected because banks’ traditional requirements do not allow for the flexibility they need. Yet there is a consistent need for financing among these borrowers, and smart solutions do exist. Often a higher but still competitive rate is a worthwhile exchange for flexibility in other areas and the value of getting the deal done.
We want to help you identify these opportunities. Here are the factors we use to determine rates for our small-balance commercial lending program at Silver Hill Funding.
Credit Score is Most Important
The borrower’s credit score is a leading indicator of how consistently they’ve made payments over time. It shows the measure of a willingness to repay debts. While many traditional lenders ignore this indicator, we factor the history, amount owed, type of credit and other aspects, in order to provide funding for a typically underserved group of commercial borrowers. Silver Hill looks for a minimum middle credit score of 660.
Loan to Value is an Indicator of Risk
Borrowers financing a higher percentage of the overall value of the collateral are viewed as higher risk, so it follows that the greater the LTV, the higher the interest rate. Silver Hill allows a maximum 75% LTV on multifamily and mixed-use properties.
Property Types – Not All Are Created Equal
Multifamily and mixed-use properties are considered less risky, and tiered to feature lower interest rates. Compared to a light industrial or automotive property for example, multifamily is generally more liquid, with multiple revenue streams. In addition, there is less risk associated with owner-occupied properties, which are less expensive to finance than investor-owned properties. We categorize multifamily and mixed-use as Tier 1; office, retail, light industrial, self-storage, warehouse, automotive and mobile home parks are Tier 2.
Loan Size and Cash Out
Our program increases rates by 25 basis points for loan amounts above $750,000. The same increase applies to cash-outs of more than 10% of the equity in a property, for cases where the borrower wants to cash out equity in order to improve the property or invest in other business opportunities.
Term and Amortization
Pricing adjustments are made based on the loan term and amortization options selected. We offer terms of 5, 7 and 10 years, with amortizations up to 25 years.
Loans with prepayment options are considered less risky for the end investor on the secondary market. With this feature comes a standard prepayment fee as a percentage of the balance. Borrowers can accept a slightly higher interest rate if they’d like the ability to pay off their loan after three years.
Now that you know the factors that impact small-balance commercial loan rates from Silver Hill Funding, you can better evaluate deals and educate your clients on the reasons why rate is only part of the equation. Which reminds us, we did say it was not all about the rate. So what else counts?
- Flexibility – Creditworthiness is determined by the borrower’s history along with the health of and revenue generated by their current business.
- Time to close – No approval committees to drag the process on for months here; our loans typically close within 35-45 days on average.
- Seasoning requirements – Creditworthy borrowers have no title seasoning requirements, and can cash out for recently stabilized properties.
- Stated income options – We offer a Streamline Program for multifamily properties that requires no business or personal tax returns or 4506Ts, which lessens the burden on you and the borrower to provide detailed income and credit documentation.
To learn more about the factors that affect Silver Hill interest rates, please see our video.