In good times or bad, business owners search for ways to reduce costs. Tying business debt into commercial mortgages can be an effective and fast way of reducing monthly expenses, but come with risk as business owners tie short term debt into long term loans.
And that is essentially where the increase in cash flow comes from. For example, by rolling credit card debt or short term equipment loans (that are often in 7 year amortization schedules) and putting them into 25 year or 30 year amortization schedules, the borrower can often see a 60% reduction in over all payments. Again, this is essentially accomplished just by spreading out the loan schedule.
Even if the interest is higher on the proposed loan than on the existing, by spreading out loan schedule the borrower will often experience lower monthly payments.
The concern for the borrower is using hard earned equity to reduce short term debt, and thus reducing ones net worth. This may not really be a hard decision for a business owner to make that's struggling and must reduce cost in order to survive. But for businesses that are doing ok this is definitly a harder call.
One potential solution is to select a commercial loan that allows the borrower to pay down the balance without incurring the prepayment penalties. So the borrower could take a portion or all of the cash flow savings and use that amount to hammer down the loan amount while still having the flexibility to use the extra cash for other purposes in tight months.
For example, the SBA 7a loan will let the borrower pay down their balance by 25% per year without triggering the prepayment penalties. Also, many CMBS loans will allow borrows to pay down by 10% and is some cases 20% per year without having to worrying about penalties.
Of course this strategy does take a lot of discipline on the borrower's part. Obviously it's easy to just take the additional cash flow and spend on other items than paying down the commercial mortgage debt.
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