What is a Mini Perm Loan?

A mini perm loan is a temporary form of financing that is commonly used in commercial projects. It is a tool that many investors use to get around traditional bank loans. If you are ever involved in a commercial development project, the chances that you will come across the need for a mini perm loan are great. So what exactly is a mini perm loan and how is it beneficial? Take a look at these details before you consider looking at a mini perm loan.

Types of Property

Any income producing property is a great use of a mini perm loan. They are almost always used on new properties that are just getting started. Some common examples of ideal properties for this type of loan are apartment complexes, retail buildings, offices, industrial parks, and land developments. Traditional lenders that offer a monthly fixed payment normally stay away from these types of investments unless they come up with a considerable down payment.

Why Mini Perm Loans?

Traditional lenders are desirable because of their low interest rates and fixed payments. However, in the early stages of a development project, these types of lenders usually stay away from income producing properties. They want to see an extended history of business success before they will lend to a project. Unless you can show them a similar project that you have done in a very similar environment, they will likely stay away.

A mini perm loan comes in and fills the void where traditional loans fall short. A mini perm loan is set up by the borrower to

cover the early phase of the development. With this type of loan, you are not tied to a strict repayment schedule which is good for new properties. It may be a few months before the property starts to generate income. Therefore, flexibility is the key to success.

Time Frame

A typical time period for this type of loan is 2-5 years. In some circumstances you could have longer terms, but this is a good rule of thumb. During that time period you are accumulating a successful operating history to show the bank. These types of loans are typically set up in a balloon payment fashion. The balance of the loan will accumulate interest and then at the end of the term is repaid.

During the 2-5 year period, the owner of the property is looking for traditional loans. Once they have displayed that they have a successful operating history, the banks will be much more likely to come on board. Banks want to lend their money because it is the only way they stay in business. However, they have to prove that they will be able to get their money back in order to justify the cost of the loan.

The success of this strategy depends upon the viability of the business that is being started. If the property performs well, they will easily be able to refinance the loan and get traditional financing. If the property struggles, it could be hard to refinance. Before you start any commercial endeavors, make sure that your business plan is solid and backed with strong projections.

Source: www.loan.com

Category: Credit

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