How to Leverage Real Estate to Pay Off Expensive Cash Advance Debts

Thousands of small business owners nationwide employ cash advance loans when they have an immediate need for cash.  It’s easy money.

Merchant cash advance lenders provide tantalizing offers, dangling tens of thousands of dollars within a few days, and often on the same day.

The rates on cash advance loans are calculated very differently than traditional loans and use a factor rate rather than a true annual percentage rate (APR) like traditional loans.  When the appropriate calculation is performed to compare the factor rate to APR, business owners are often shocked to learn that they are paying well north of 100% APR on their cash advances.

But the purpose of this article is not to argue the merits of cash advances.  The cash advance industry exists because there is a demonstrated need for short-term cash in today’s bustling marketplace.

The purpose of this article is to share strategies on how business owners can get out from underneath these expensive debts by leveraging real estate that is owned by the business owner.

Small Business Owners Who Own Their Building

If the small business owner (SMB) owns the building where their business operates, it is possible to refinance the building and pull cash out to pay off the cash advances.  In commercial real estate parlance, this is considered an owner-occupied commercial real estate loan.

It is important for the SMB to understand that they will probably need to refinance their existing mortgage on their building to pull cash out.  They may be loathe to do so because their existing loan is a very low interest loan and they do not want to replace it with a higher interest rate.

For a SMB in today’s marketplace, an owner-occupied cash-out loan may cost somewhere in the range of 10.5% – 12.5% APR.  While this is on the high end of interest rates, it is a small fraction of what they are paying when compared to cash advance rates.

And the monthly payment is also dramatically lower.  For example, a client currently is paying north of $50k per month in cash advance fees.  When we did the math on pulling cash out of their property to pay off all their cash advance loans, their monthly payment was $7,800.  Big difference!

Is It a Viable Business?

If the SMB is seeking to procure a cash-out commercial real estate loan for an owner-occupied building, they need to be prepared to show strong income statements and tax returns.  In short, we need to be assured that the business income is strong enough to comfortably afford the monthly payment.

Here at Boulder Equity Partners LLC, we are going to be relatively conservative on behalf of business owners, doing our best to make sure they do not get themselves into a position where they cannot afford their monthly payments.

Two Different Types of Cash Out Loans for Owner-Occupied Commercial Real Estate

The two different commercial real estate loan options are short term bridge loans with 1–2-year terms, and long-term loans with 5-30-year terms.

Short-term bridge loans typically are more expensive but can require less paperwork and can fund more quickly.  The advantage of bridge loans is that they have very limited prepayment penalties, so the SMB can refinance them back into lower interest loans more quickly, saving money in the long run.

Longer term loans can have the advantage of higher loan to value, allowing for larger loan amounts, and the rates can be more competitive.  But prepayment penalties will be longer — typically 3-5 years — so that needs to be taken into consideration.

Some SMBs with solid financials and a strong working relationship with their bank might be able to secure bank financing.  That stated, banks are traditionally risk-averse and typically are not as keen on providing cash-out loans.  So, it may be in the best interest of the SMB to employ the services of a private lender like BEP to secure the cash-out loan, then refinance back with their bank at a future date for a rate and term loan, where no cash is sought at funding.

Investment Properties

If the SMB owns any non-owner-occupied properties, like single family rental homes, other commercial properties, etc., the options for pulling cash out can often be easier, and less expensive.

The reason?  Because as a lender, Boulder Equity Partners LLC is underwriting the income from the subject property, not SMB’s business.  The business income for the SMB is largely irrelevant when underwriting a non-owner-occupied property.

These types of loans are typically easier to underwrite, with long-standing, proven underwriting standards. For example, today, rates for cash-out loans on up to 75% of the property value on 1–8-unit residential properties range from the mid-6% range to the mid/high 7% range.

Personal Residence — Owner Occupied Home

The least appealing option for a SMB is to pull cash out of their personal home, either by refinancing their long-term mortgage or through a HELOC home equity loan.

This approach is littered with moral and ethical considerations.  The SMB has to ask themselves if they want to put their family home at risk if for some reason their business falters. In addition, the loan will be underwritten based upon the SMB’s personal income, typically requiring three years of tax returns and a lot more scrutiny.  BEP does not provide loans on owner occupied residences.

As you can see, there are many options to pay off expensive cash advance loans through refinancing real estate.  Feel free to reach out by phone or email if you would like to discuss your unique situation.

Boulder Equity Partners LLC is a nationwide lender for commercial real estate offering a wide range of loan programs including construction loans, perm loans, and bridge loans that can be migrated to perm loans.