Business commercial finance mortgages

The metamorphosis of business investments and how they can be financed is amazing!  Actually, anyone who admits that they know everything about the financing of businesses is always shocked by how much they do not know.  Well, most discussions on business capital will rotate around the beaten path.

You will hear that equity financiers are composed of angels, venture capitalists, corporate venture capitalists, mezzanine financiers and more.  You will also hear about the governments’ participation in business through direct and indirect funding or through public private partnerships (PPP’s).  It is highly likely that you will also hear about business debt financing. 

This basically means finances obtained from banks and other commercial lenders.  These lenders will invariably request investors and loan seekers to provide security before the finances are released. 

Security for loans and real estate

Security or collateral for these loans can be in any accepted or agreed form.  Examples include the pledging of shares or equity in your company, depositing titles to your assets (chattels mortgage), guarantees by friends and even mortgages over your property.  Let us discuss the use of mortgages as a form of securing financial assistance from lending institutions. 

A mortgage can be defined as the transfer or conveyance of title or ownership by a borrower (Mortgagor) to a lender (mortgagee) who will advance the required amount.  The title is only retransferred upon the fulfillment of preset conditions.  An important point to note is that mortgages will only apply to land which legally includes houses and anything that is permanently attached on it.

Some considerations prior to mortgaging

Traditionally, advancing of commercial mortgages to individuals or to the corporate world has always been done with a lot of care.  The reason has been that perfection of security for the lenders was and is still so important in order for them to keep positive liquidity in the financial market. 

However, in the recent past, acquisition of a mortgage did not necessarily need stringent requirements, thanks to the concept of sub prime lending and mortgaging.  This concept embodies the notion that banks and other lenders can loosen these requirements for the benefit of the masses who need business finance. 

We know that the consequence of this perception has been the current credit crunch as a result of unprecedented defaults and foreclosures.  So what does this portend for business financing through commercial mortgages?

Things lenders will look out for

As discussed, lenders are now more scared to advance loans against property.  However, they will still lend if a potential borrower is able to prove the following:

Reasonable equity

Equity here means the difference between the true market value of the home and the amount outstanding as loan or any form of debt against the particular title.

Liquidity risk

It is critical for lenders at this time to know if they will be in a position to realize their security in the event of default by the borrower.  Liquidity risk therefore means the lenders assessment of the property and their conclusion on whether there will be willing buyers at the time that they intend to sell it in case of default in payment.

Credit history of borrower

Being aware of the fact that banks may share information about investors, your rating by stakeholders will be of great significance when deciding on whether to accept or refuse a proposed mortgage facility.

Please remember that the counsel of lawyers is very critical as far as mortgages are concerned.

References

1. http://en.wikipedia.org/wiki/Credit_rating
2. http://www.investorwords.com
3. http://definitions.uslegal.com/c/collateral/
4. http://en.wikipedia.org/wiki/Mezzanine_capital