What is a permanent mini loan? : A guide for investors
A permanent mini-loan, sometimes also called a take-out loan, is a type of commercial construction loan. If you are looking for short term electronic finance to help you start your business, a permanent mini loan may be the way to go. Read below to learn more about these loans, how they work, and the pros and cons of using them as part of your fundraising strategy.
What is a permanent mini loan?
Basically, a permanent mini-loan is a type of short-term financing used for commercial real estate entities such as shopping malls, restaurants, and industrial property. It is often a bridging loan between the repayment of the ready to build used to build the property and when the borrower is finally able to qualify for more permanent financing.
Project developers often have to rely on this type of financing as new commercial spaces are generally viewed as a high risk of default in the eyes of commercial banks. Typically, it may take some time for these properties to build up a consumer base and start generating the level of income necessary to meet permanent loan payments. Permanent mini-loans give them the flexibility they need during those first few months, as well as the ability to start building a proven payment history.
It is important to note that permanent mini loans are different from another type of business loan called a construction loan to permanent. A construction-to-permanent loan allows you to turn construction costs into longer-term financing after the construction phase is complete, without taking out a new loan. The permanent mini financing, however, requires you to take out new financing.
Important loan terms to consider
term of the loan
The loan terms on permanent mini financing generally vary between two and five years. Having said that, it is possible to get a permanent mini loan with a longer loan term. These longer term loans are generally divided into two distinct categories, depending on the method of repayment.
Mini hard permanent loans
Mini hard permanent loans usually have loan terms that last up to seven years. After these seven years, a lump sum payment is usually due for the balance of the loan amount. If the borrower does not have enough cash to pay off the remainder of the principal, he risks defaulting on the loan.
Low-rate permanent mini-loans
Meanwhile, low rate permanent mini loans tend to have even longer loan terms. They can sometimes last up to 25 years. However, these loans often offer prepayment incentives. For example, after a few years, the line of credit can increase significantly. Notably, unlike hard standing mini-loans, these loans do not come with a balloon payment that borrowers need to worry about in a few years.
For the most part, permanent mini-loans will be recourse loanswhich means that in the event of default on your part, the lender can attack other assets in addition to those which serve as collateral for repayment. However, it is possible to find a few non-recourse options in the market.
That said, be aware that these options will likely be limited to only the most creditworthy borrowers. Still, it is important to shop around when looking for one of these loans because each lender will have different eligibility standards and you never know what options you might be offered.
Benefits of mini permanent financing
While it might seem like an extra step to think about getting a bridging loan between a construction loan and more permanent financing, there are many benefits to getting a short-term loan. They are as follows:
Provides a solution
In short, many companies are turning to permanent mini loans because they offer a concrete solution to a problem they are facing. Many businesses need working capital when starting a business, but cannot qualify for a traditional bank loan. Permanent mini-loans give them the project finance funds they need to grow their business at a time when few investors are giving them the time of the day.
More flexible qualification standards
Although most commercial banks offer these loans, it is usually not the large companies that offer the best terms for small startups. On the contrary, most investors look to smaller banks which can offer more flexible qualifying standards for their fixed assets. These banks or lenders can often review applicants on a case-by-case basis to decide whether they feel confident to take on their debt and default risk.
However, from a borrower’s perspective, this is often an advantage as it gives them access to cash flows that they might not otherwise be entitled to, especially in a large bank where qualification standards are uniform in all areas.
Flexible repayment terms
Often, permanent mini-loans also come with flexible repayment terms. In particular, on low rate permanent mini loans, it is important to note that there is usually no prepayment penalty. In fact, borrowers are often encouraged to repay the loan early to avoid a possible change in loan terms that would put them at a disadvantage. This flexibility means borrowers are likely to find permanent mini loans to suit their needs.
Disadvantages of permanent mini financing
There really is only one major downside to taking out a permanent mini loan – this type of financing tends to get expensive. According to Robert J. DeAngelis, executive director of marketing for Tiger Group in Boston, it’s not uncommon for them to have interest rates in excess of 10%.
When you look at the configuration behind these loans, it is not difficult to see why. From a lender’s perspective, lending to a new business – especially a newly built business that has not yet had a steady influx of customers – carries a huge risk of default. Imposing a higher interest rate is one way for the bank to ensure that it receives repayment of the loan.
The bottom line
Mini-permanent loans are not the most common method of financing, but they present an opportunity for start-ups to get the working capital they need to start a business. If you are looking for this type of loan, you should do your best to research the best rates. You should also make sure that you carefully review the loan terms so that you understand exactly what you are agreeing to when you sign on the dotted line.