Commercial real estate insurances are very different when compared to residential insurances. It is actually more complicated because it has very different terms and conditions when compared to the terms and conditions of home insurances. This is one of the reasons why most investors are afraid to venture into the commercial real estate market.
Small investors in residential real estate are usually limited to about four to ten properties worth hundreds to thousands of dollars before lenders conclude that this is a sufficient level of risk and no more insurances will be made. Insurance requirements for commercial real estate can vary greatly between private lenders and banks. Also, insurances held in a single lender’s portfolio may vary based on the risks perceived by the lenders.
Commercial Bank Insurances
Typically, the banks want you and your partners to provide at least 20-25% of the property value as a down payment. For example, if the property value is around RS 4 Cr, you will have to contribute around RS 80 Lakh- 1 Cr as down payment. Recent research has also shown us that most businesses have failed due to lack of sufficient capital to meet the needs.
For this reason, banks often require the company to maintain a large cash reserve that can be drawn down if the cash flow is insufficient to make insurance payments. This financial requirement is added to the huge down payment. One strategy some commercial investors use is to borrow as much money as possible (even at a higher interest rate) to provide ample capital to build the business and thus increase cash flow.
private business insurances
Private lenders or non-bank lenders usually offer less stringent requirements for business insurances. There are a few lenders that require a lower down payment (ranging from 10 to 15%). These lenders often agree to take the insurance amount up to 20 or 30 years until it is paid in full (in most cases). However, they charge a slightly higher interest rate compared to the banks (1% or 2% higher than the banks rates).
But when all the math is done, a high interest rate may not seem as expensive as it seems the first time around. Calculate the higher interest cost over the life of the insurance and compare it to the cost to pay to open a new insurance (two or three times when the balloon payments are due).
The emergence of private or non-bank lenders poses a challenge to banks over the terms of their conventional insurances. As banks continue to tighten insurance sanction requirements, these private lenders are moving towards a larger share because it makes it easier to qualify. So, if you are looking for a smaller business insurance (less than 15 kr) or a medium insurance amount (less than 35 kr), consider taking your time so that you can find lenders who can offer you acceptable time and term limits. .