Interest Rates Are Going Up in 2022 - Are You Prepared?

Happy Holidays!  There are both some positive and negative changes coming to Commercial Lending in 2022.   We would like to take the time to highlight those changes so business owners and real estate investors are braced and prepared to face both the good and the bad.  At CLX, we pride ourselves on helping navigate the process, and want to be up front on what you can expect from 2022.  We will highlight the negative changes first, followed by the positive changes you can expect in the New Year. 

Negatives in 2022:

1. Interest rates are definitely going to be higher in 2022.  The Federal Reserve announced last week that they have budgeted three interest rate increases during 2022.  When the Federal Reserve adjusts interest rates they are adjusting the Fed Funds Rate, which is the interest rate banks borrow money at.  When those rates go up the cost of funding loans goes up for Banks.  Correspondingly, the Prime Interest Rate, which is the daily borrowing rate Banks use for their customers, goes up by the same amount the Federal Reserve raises the Fed Funds Rate.  Historically the Federal Reserve has always raised or lowered the Fed Funds Rate by at least a 0.25%, but there are times when the increase or decrease have well exceeded 0.25%.  Right now, we are likely looking at the Prime Rate going up by at least 0.75% next year, which would take Prime from 3.25% to 4.00%, and that increase could be even higher if the Federal Reserve increases the Fed Funds rate by more than 0.25% with any of their three planned interest rate increases in 2022.​​
   
   What does such an increase mean to you?  If you have a variable rate loan based on the Prime Rate, you could be looking at your interest rate on that loan going up by 0.75% by the end of 2022, or even potentially higher.  On an interest only basis any 0.25% increase in the Prime Rate represents $250.00 per $100,000 borrowed.  If the Prime Rate goes up by at least 0.75% in 2022, you would be looking at around a $750 increase annually in your required loan payments for each $100,000 borrowed.  In addition to variable rates going up, typically increases in the Prime Rate correspond to increases in Treasury Rates.  Treasury Rates are used by Banks to price long-term fixed rate debt like commercial term loans and commercial mortgages.  Right now, fixed interest rates for longer-term debt start in the low 3.00% range and go up to the low 4.00% range.  With a 0.75% increase in the Fed Funds and Prime Interest Rates in 2022 you could see fixed interest rates for long-term debt easily move into the range of 4.00% to 5.00% or even higher in 2022. 
   
   What can you do about these impending interest rate increases to protect yourself?  If you have a variable rate loan now, you may want to look at refinancing into a fixed rate.  Currently fixed interest rates are still near historic lows.  It is a great time to lock in long-term financing.  If you have a fixed rate loan that will be maturing in the next couple of years, you might want to consider refinancing now and locking in a long-term fixed rate.  Even if you have a prepayment penalty on your current loan, it may be worth it to pay that penalty to refinance into a fresh fixed rate term at historically low interest rates versus running the risk of potentially having a substantially higher interest rate to refinance into next year or even two or three years from now when interest rates may even be higher.
    
2. It appears the government stimulus is done.  The Economic Injury Disaster Loans (EIDL) are done, the Payment Protection Plan (PPP) loans are also done and look unlikely to be extended, and the specialty funding programs and reduced fees under the Small Business Administration (SBA) loan programs are also done.  With rapidly increasing inflation, it looks unlikely any of these programs will be extended into 2022.
    
3. We anticipate Banks are going to continue to be conservative when lending to companies that were hard hit by Covid-19 or to industries that they anticipate will continue to be hit by changes in the market.  Any business whose revenues and cash flow have not recovered will continue to have a harder time getting conventional bank financing done.  Certain businesses that were hardest hit like hotels, restaurants, and entertainment, are likely to experience the most hardship when looking for commercial financing.  We also anticipate Banks are going to take a more conservative approach when it comes to financing for harder hit commercial investment properties like office and retail properties.  Banks are concerned about how quickly people will return to the office and how that will impact office buildings, and Banks are concerned about the continued shift to online buying and what on-going impact that is going to have on retail properties.    

Although we anticipate the above headwinds going into 2022, there are certainly some positives we would like to highlight as well.

Positives in 2022:

1. Although interest rates will move higher in 2022, interest rates are still near all-time lows and there are plenty of opportunities to still lock in solid long-term interest rates today before they move higher.  Even if you have to take a higher rate product, you are still getting a better deal from a historical perspective then many have in the past.    

2. Unlike with the Great Recession in 2007 and 2008 where Banks were in bad shape financially, Banks continue to be flush with capital and deposits, and have remained very profitable even despite the pandemic.  This means Banks have money to lend and although some criteria might tighten, Banks are going to still be looking to make loans and the financing market will remain strong.

3. SBA lending programs continue to be available for borrowers and even though some of the cost saving features are gone, many more Banks are now participating in these programs providing more financing options for small to mid-sized businesses.  The SBA 504 refinance program is also continuing beyond 2021 as a more permanent expansion of the SBA lending programs, which will provide the ability for many SBA 7A borrowers to refinance from a variable rate product to a fixed rate product.   

4. The number of non-bank lending programs (individuals, private funds, family offices, and corporations that are not Banks but have lending products) have continued to grow and today there are more alternative programs than ever before that commercial loan borrowers can take advantage of.  These products include bridge loans, private money loans, factoring, equipment financing, and conforming owner occupied and investment real estate programs with competitive interest rates for just about all real estate types. 

Although there are certainly some headwinds when it comes to getting a Commercial Loan in 2022, the market is still strong and there will continue to be plenty of financing options available.  If you are looking to expand your business or refinance debt to take advantage of current low interest rates before they move up, we would love the opportunity to talk with you about your options.  With over 350+ lending partners that run the gambit from Banks to Credit Unions to a wide variety of non-bank lenders, we can typically present multiples solutions to just about every financing need we encounter.  Please do not hesitate to reach out to us at any time at 630-988-4852 or via email at brad@commerciallendingx.com.  Thank you and we wish you Happy Holidays and a Happy New Year!  Hopefully 2022 will be a great year for all of us. 

Key Lending Programs to Consider in 2022:

SBA 504 Property Acquisition and Refinance Loans – Utilizing the SBA 504 loan program, you can now qualify to purchase or refinance 51% or more owner-occupied commercial properties and existing business equipment debt into long-term fixed rates via the SBA 504 program, including refinancing other existing government guaranteed debt such as existing SBA 504 loans and SBA 7A loans.  You can secure 10-year fixed rates on equipment and 20 to 25-year fixed rates on 51% or more owner-occupied real estate with interest rates below 3.00% today.  In some cases, you can even take cash out up to 85% of value to cover other business-related debt, and with no cash out can refinance up to 90% of value.  

Conventional Bank Property Acquisition or Refinance Loans – We still have many Banks and Credit Unions being aggressive in the financing they are willing to provide for acquiring or refinancing owner-occupied commercial properties or acquiring or refinancing commercial investment properties (retail, office, industrial, etc.).  We are still getting loans done with fixed interest rates starting in the mid 3.00% range, and are not only getting 5-year balloons done but also 7-year and 10-year balloons as well as some 5, 7, and 10-year ARM mortgages done as well (where the loan is fixed for 5, 7, or 10-years with the rate adjusting every 1, 5, 7, or 10 years after the initial fixed rate period for another fixed rate term), with an entire loan term of 20 to 25 years. 

Low Documentation Owner-Occupied Commercial Property Financing – Utilizing bank statements versus operating statements or tax returns, we can refinance owner-occupied commercial properties into either a 5/1 ARM or into a 30-year fixed rate mortgage with rates starting in the high 4% range and provide cash-out up to 70% to 75% of property value depending on the property type and available cash flow.  This program is great for businesses that lost money during Covid-19 but still had revenues and have equity in 51% or more owner-occupied commercial properties.   

Low Documentation Commercial Investment Property Financing – Utilizing leases, a rent roll, an operating statement, and bank statements for the property versus tax returns, we can refinance commercial investment properties into either a 5/1 Arm or into a 30-year fixed rate mortgage with rates starting in the high 4% range and provide cash-out up to 70% to 75% of property value depending on the property type and available cash flow.  This program is great for real estate investments that did not report sufficient cash flow historically via tax returns or recently became stabilized and the Borrower is looking to get cash-out.  

Single Family & Multi-Family Investment Property Program – using an application and either existing property income and expenses or projected property income and expenses, we can finance single family and multi-family investment properties on a 5/1, 7/1, 10/1 Arm or a 30-year fixed rate mortgage with rates starting as low at 4% and cash-out up to 75% of value and purchase money up to 80% of cost depending on cash flow.  Qualifications are largely based on the subject properties ability to support debt service at as low as a 1.00x debt service coverage ratio and the borrower’s credit score.  This program is a great way to get cash-out of existing investment properties and maximize the return available. 

SBA 7A Loans – whether buying a business, buying 51% or more owner-occupied commercial properties, starting a business, needing capital to expand your business, needing funding to refinance existing 51% or more owner-occupied commercial properties, refinance other business debt, or a combination of any of the above, SBA 7A loans can present a great solution for you.  With 10-year loan terms for business debt, 25-year loan terms for real estate debt, and blended loan terms between 10 and 25 years for debt that is a combination of both owner-occupied commercial property debt and business debt, SBA 7A loans provide long-term amortizations reducing monthly debt service.  SBA 7A loans can be used to consolidate existing debt and reduce monthly payments, while also getting additional capital to operate your business.  Also, SBA 7A loans do not need to be fully collateralized by hard collateral and typically they come without any loan covenants (future conditions to hit like a debt service coverage ratio).  For businesses that are struggling to hit existing debt service coverage ratios at their existing banks, sometimes a restructure into an SBA 7A loan will help them qualify by extending out the payments into a longer amortization.  For Borrowers who are short the collateral to support existing debt obligations, the SBA can step in without being fully collateralized and provide the capital necessary to refinance debt or expand without being fully collateralized so long as the cash flow is there to support the loan based on SBA amortization schedules.     

Become a CLX Referral Partner

Do you have customers in need of commercial financing and you do not know how to help them?  Here at CLX we offer several programs in which you can become a referral partner and earn commissions on opportunities you run across.  You can be involved as little as providing us with a name and phone number.  Or if you prefer, you can help manage the client through the entire lending process.  We have many training tools and marketing materials available to us to help you grow your own client base.  Please contact us directly at info@commerciallendingx.com if you are interested in learning more about referring business to CLX.  

About Commercial Lending X

CLX is a small business that specializes in helping other business owners get the business loans and financing they need to be successful.  To learn more about CLX and the services we provide please check out our website at www.commerciallendingx.com.  You can also contact us directly at info@commerciallendingx.com or via phone at 888-975-0007.