A mini perm loan, sometimes also referred to as a takeout loan, is a type of commercial construction loan. If you're looking for short-term e-financing to help get your business off the ground, a mini perm loan may be the answer. Read on below to learn more about what these loans are, how they work, and the advantages and disadvantages of using them as part of your financing strategy.
What is a mini perm loan?
At its core, a mini perm loan is a type of short-term financing that's used for commercial real estate entities like shopping malls, restaurants, and industrial property. It often acts as a bridge loan between paying off the initial construction loan used to build the property and when the borrower is eventually able to qualify for more permanent financing.
Project developers often need to rely on this type of funding because new retail spaces are usually considered to be a high default risk in the eyes of commercial banks. Typically, it can take a while for these properties to build up a consumer base and to start generating the level of income necessary to keep up with the payments on a permanent loan. Mini perm loans provide them with the flexibility they need during those first few months, as well as the ability to start establishing a proven payment history.
It's important to note that mini perm loans are different from another type of commercial loan, known as a construction-to-permanent loan. A construction-to-permanent loan allows you to roll the costs of construction into longer-term financing once the building phase is complete, without taking out a new loan. Mini perm financing, however, does require you to take out new funding.
Important loan terms to consider
The loan terms on mini perm financing typically range between two to five years. With that said, it is possible to get a mini perm loan with a longer loan term. These longer-term loans are typically divided into two separate categories, depending on how repayment works.
Hard mini perm loans
Hard mini perm loans typically have loan terms that last up to seven years. After those seven years, a balloon payment usually comes due for the balance of the loan amount. If the borrower does not have enough cash flow to pay the remainder of the principal, they risk defaulting on the loan.
Soft mini perm loans
Meanwhile, soft mini perm loans tend to have even longer loan terms. They can sometimes last up to 25 years. However, these loans often offer incentives for prepayment. For example, after a few years, the credit margin might increase sharply. Notably, unlike hard mini perm loans, these loans do not come with a balloon payment that borrowers have to worry about a few years down the road.
For the most part, mini perm loans will be recourse loans, which means that in the event that you default, the lender can go after other assets in addition to any that are serving as collateral for repayment. However, it is possible to find a few non-recourse options on the market.
With that said, be aware that those options will likely be limited to only the most creditworthy borrowers. Still, it's important to shop around when you're in the market for one of these loans because every lender will have different qualifying standards and you never know what options might be made available to you.
Advantages of mini perm financing
Though it might seem like an extra step to think about getting a bridge loan in 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 turn to mini perm loans because they offer a concrete solution to a problem they're facing. Many companies need working capital when they're first starting their businesses but are unable to qualify for a traditional bank loan. Mini perm loans give them the project finance funds they need to build up their company at a time when few investors will give them the time of day.
More flexible qualifying standards
While most commercial banks do offer these loans, it's usually not the big-name companies that offer the best terms for small startups. Rather, most investors turn to smaller banks who can offer more flexible qualifying standards for their fixed assets. These banks or lenders can often look at the applicants on a case-by-case basis to decide if they feel confident in taking on their debt and default risk.
However, from the borrower's point of view, this is often an advantage because it gives them access to cash flow that they may not otherwise qualify for, particularly at a big bank where the qualifying standards are uniform across the board.
Flexible repayment terms
Often, mini perm loans also come with flexible repayment terms. In particular, on soft mini perm loans, it's important to note that there's usually no prepayment penalty. In fact, borrowers are often encouraged to pay off the loan early to avoid an eventual change in loan terms that would put them at a disadvantage. This flexibility means borrowers are likely to find mini perm loans that suit their needs.
Disadvantages of mini perm financing
There is really only one main disadvantage to taking out a mini perm loan: This type of financing has a tendency to get expensive. According to Robert J. DeAngelis, the executive marketing director of Tiger Group in Boston, it's not uncommon for them to have interest rates that soar above 10%.
When you look at the setup behind these loans, it's not hard to see why. From a lender's perspective, lending to a new business -- especially one that's newly-built and has yet to have a steady influx of customers -- presents a huge default risk. Charging a higher interest rate is a way for the bank to ensure they'll receive repayment on the loan.
The bottom line
Mini perm loans are not the most common method of financing, but they represent an opportunity for fledgling businesses to get the working capital they need to get their start-up off the ground. If you're in the market for this type of loan, you should do your best to shop around for the best rates. You should also make sure to review the loan terms carefully so that you understand exactly what you're agreeing to when you sign on the dotted line.