A. S.B.A.
(Small Business Administration loan) - There are two common types of S.B.A. real estate loans, 504 or 7a. These programs help many businesses acquire real estate for business by granting a second mortgage at 40% of the loan value up to two million dollars. The investor can put as little as 10% on a down payment to close the deal. The 7a loan guarantees 75% of the loan, but the 504 does not guarantee the loan to the lender. There are fees ranging between 2-3.5% for these loans and you can face a prepayment penalty as well. For the cost of the debt, S.B.A. financing is one of the best sources of funding to help entrepreneurs acquire real estate because the S.B.A. portion of the loan is usually a lower fixed rate loan. There are some rules that apply and you can only have one S.B.A. loan under your name at a time.

B. Conduit financing
Whenever you see someone offer you an interest rate well below prime, you can almost guarantee that this rate will be for conduit financing. The rate is tied to the 10 year Treasury rate. Conduit financing rarely reaches 70% of a property’s value, but the good news is that the appraisals can be generous enough to realize some of your equity gains. Conduit loans are the foundation of Commercial Backed Mortgage Securities (CBMS). Generally, the lender takes your loan and bundles it with several others loans and sells it to another party. This party, in turn offers an annuity to an investor based off the revenue from your loan payment, almost like a bond. Because conduits count on your revenue stream, prepayment penalties can be heavy and loan may or may not be assumable. You also want to check to see if the conduit loan is a full recourse loan, which means that you have to personally guarantee the loan to the lender. They have property tax, insurance, and capital improvement impound accounts that are tacked onto your mortgage payment. If your property has a lot of equity built up and good cash flow, conduit financing is a great way to tap into it at a lower financing cost.

C. Mezzanine Financing
This type of financing allows for lower down payment because the mezzanine investor is like a temporary equity partner in the project that puts up the additional down payment you need to have the loan approved. The investor looks at the projects, usually valued at ten millions dollars or more, and scrutinizes the financials to determine if they can achieve their required return on investment. They typically look for 12-18% return on their investment annually for a short period, usually five years. It is an interest only loan and when your term is up, you will need to essentially buy out their stake. You can refinance and use the proceeds of the extra capital to pay off the investors. It should be noted that for all business purposes, mezzanine financing is a debt, until you default on any of your obligations. At that point, they will exercise an option to convert their loan into an equity stake so that they can marginalize any loss potentially incurred.

D. Refinancing & Cashing Out
When you refinance a property, you may be able to pull some extra funds out above what is due to pay off your existing debt. It is called cashing out. In order to ensure you get the funds you need, you want to make sure that you list your uses for those funds. You may want to pay off a credit card debt with those proceeds, but you would help ease the lender’s mind if you were able to show that the debt was for office equipment and furniture or for any other business purpose. If you invested additional personal funds into starting the business up, you want to make sure that you document it as a liability.

E. Hard Money
Hard Money is the term used for the financing people receive who are not considered as financially settled or their property is of questionable profitability. Low credit scores or lack of financial history on the borrower are some of the factors that play into hard money loans. The term ‘no doc’ or ‘stated income’ refer to loans based just on good credit scores of the borrower. Generally, down payment requirements are higher than traditional financing due to the risk factor for the lender. For a person starting out though, it allows for the opportunity to begin business venture where a traditional lender such as bank could not help. Hard Money financing is done through private lenders who assume extra risk for additional compensation in term of origination points and higher interest rates.

F. Bridge Financing
Bridge financing is generally short term financing. In fact, sometimes they are perfect for deals that require very fast closing. The private lender uses the borrower’s credit score and net worth to guarantee the loan. It is not uncommon for hard money loans to close in a less than a week. The borrower typically pays a premium for this in order to substitute paying all cash for a project. Those situations do usually require a borrower that has significant equity to gain the lender’s support. In general, bridge financing is used to get relatively quick funds to close a deal for an investor. Once the real estate is acquired, the borrower can factor in all their cash flow and tax consequences to find more traditional financing.

G. Construction -Take Out
Construction loans are financed based upon the cost of construction. Depending on the type of real estate you are constructing, you can get up 90% financing for construction projects. Often times, the lender will only want to be around for the construction process. Once construction is complete, the borrower will get another loan to pay off the construction loan and pay it off over an extended period of time. This is known as a “Take out” loan. The two loans are usually originated at one time. This can be seen quite often with S.B.A. financing and conventional financing ‘taking out’ the construction loan.

H. 20-30 year Amortization (Short term and long term)
This type financing is pretty straightforward. It is similar to home mortgages in that your monthly payment allows you to pay interest and a portion of principal until the balance is paid off.

There are also loans that are 30 year Amortized, but due in less time. For example, a 30 year amortized loan that is due in seven years means that the monthly payments will be small enough to cover a 30 year period, but at the end of the seventh year, you will have a balloon payment (the remaining principal due).