Shopping for a commercial loan? Not all loans are created equal.

• Author: Young, Steven M.
• Position: Business Finance

THE RATE YOU PAY FOR borrowing money is an important consideration. However, other terms and conditions may be just as important. Consider these:

Fixed or variable. Variable-rates loan generally start with a lower rate. With variable loans, the borrower assumes interest risk (risk the rate may increase over the life of the loan).

A fixed-rate transfers interest risk to the lender. This is why fixed-rate loans are priced higher. The difference in rate is the premium you pay for peace of mind.

Index and spread. Commercial loans are priced as a percentage or "spread" over an "index rate." There are several indexes used by banks. The prime rate is a common index used for variable loans. Treasury notes are commonly used for fixed-rate loans.

Know how your rate is determined, which index is used and how to track it, especially if choosing a variable-rate or short-term fixed-rate option.

Loan-to-value. If borrowing for equipment or real estate, your loan amount will be expressed as a percentage of value, also known as loan-to-value or LTV.

For real-estate loans, LTV is expressed as the lower of cost or market. This is important if you are getting a good deal on the purchase price.

Assume you're buying a building for $700,000 with an appraised value of $800,000. If your bank offers to finance 75 percent LTV, you may borrower 75 percent of the lower of cost or market, in this case $700,000. Your loan will be for $525,000 not $600,000.

Equipment financing has its own nuances. Know which valuation method your bank uses. Market, orderly liquidation and forced-liquidation methods will result in different values. The method your bank uses can have an impact on the amount you can borrow.

Term vs. amortization. "Amortization" is the length of time used to calculate your payments. "Term" is the time you have to repay your loan. In long-term financing, amortization and term may not be the same.

You may be offered a 25/10 real-estate loan. Here your payment is calculated as if you had 25 years to repay, but the entire balance will be due at the end of the 10th year. You bear the responsibility of the balance when due.

Cross-collateralization. Banks like to be very secure when lending by taking blanket liens on all assets. Carefully consider the impact this may have...