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Types of Loans

As noted earlier, the most common form of a commercial loan tends to be those with lending terms for short time windows, i.e. bridge loans.  The industry is not oriented towards traditional loans most people think of lasting fifteen to thirty years.  That said, there are also commercial loans that can be as long as five or ten years in term period, with profit booster in the form of a balloon payment at the end of the term cycle. This kind of a cash crunch at the end means the borrower either needs to come up with the cash to pay it, take out a new loan to pay off the old one, or sell the project to pay for the final loan payment.

Because of the high risk involved in bridge loans many traditional lenders, even if they operate in commercial lending, steer clear of these short-term needs.  As a result, many bridge loans originate with private lenders rather than institutions such as banks.  With problems in project documentation, high potential for failure, lack of clearances or permits, many projects would otherwise not be funded enough to get these issues straightened out were it not for bridge loans. 


Commercial loan
However, the price for this financial rescue is, of course, expensive. Bridge loans are generated by investors, investment groups and business that charge high interest packages to cover their involvement risk.  Bridge loans are not intended to finance the entire project; they are provided to give enough cash flow for the borrower to get their issues straightened out for more traditional lending. In doing so, large profit can be made in the interim.

Other commercial loan terms may include restrictive payoff penalties. The intent is to make sure the borrower pays the expected interest amount so that profit materializes for the lender. An early payment throws off profit expectations and the borrower could have made more money lending the money to another party that stuck with the full time period terms.  To discourage early payment, terms can include what’s called a “pre-payment penalty" to make it costly. 

This approach makes sure the lender still gets the expected profit margin from the loan, regardless of whether it is paid early or on schedule.  Prepayment penalties are usually phrased in such a way as to make early payment in the first five years of a commercial loan unwise and expensive compared to the overall lending period, at least from the borrower’s perspective.

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