Commercial Refinancing - Key Factors To Consider

The decision to refinance a commercial loan is an important one. In this article, we take a look at the key factors to consider when you are considering commercial refinancing.

Why should you pay attention to refinancing standards? Well, refinancing is infinitely more common in the world of commercial financing than it is with personal loans. It is fairly rare for a commercial loan to be paid up completely through its term. Instead, loans are refinanced constantly to roll over balloon payments that are usually built into the loans themselves. The common analysis used in a commercial refinance transaction is the discounted cash flow method. This is essentially a comparison of the current loan with the proposed loan on a net value basis.

Cash flow is obviously the most important factor looked at. Specifically, what is the effect on cash flow of the proposed refinance? Ironically, you are in concert with the views of the lender on this. After all, don't you want cheaper terms than you had on the original loan? One method used frequently is to extend the amortization on the refinance to lower the payments, a method both the lenders and clients are happy with.

Closing costs are another factor to take into account when refinancing. I don't have to tell you they can add up quickly on a commercial loan. The good news is most of the costs and fees can be rolled into the refinanced loan, but one can expect to pay for the appraisal and any environmental reports. Still, that is a significant up front cash savings.

The payback time is another calculation you absolutely must take a look at. How so? The payback time is the time it will take to recover your cost of the refinance after completing the transaction. There is no set time per se, but the calculation helps clients understand clearly whether they are getting a positive deal or not. If it is going to take 10 years to recover the cost of a refinance, it might not seem like such a great deal.

There are obviously many other factors that go into any commercial transaction. The key is to understanding refinancing is very common in commercial finance and how to go about smoothly getting through your transaction.

Thomas Ajava writes about commercial financing lenders and other commercial topics for CommercialFinancingLenders.com.