No matter the situation, buying a commercial property is a big decision and major commitment. Business owners seek financing via a commercial real estate loan to fund their projects. With this financial commitment comes responsibility, and lenders want to make sure that all payments will be fulfilled. Here are a few factors that lenders look for before approving you for a commercial real estate loan.
It’s not uncommon for commercial real estate loans to have a higher level of scrutiny than traditional loans (i.e., residential mortgages). This is because businesses are risky and lenders want to make sure they get the money they lend back. Both banks and commercial lenders will take the time to look over finances such as cash flow to ensure that the loan can be repaid.
You’ll want to provide an income statement, balance sheet, cash flow statement, and a retained earnings statement so the lender can make an accurate decision. All of this information also provides important information for calculating your business’ debt service coverage ratio. This ratio is simply your NOI (annual net operating income) divided by the annual total debt service. Many lenders require that you have a ratio of 1.25 or higher. Additionally, your business’ credit score will be checked to help determine the interest rate, payback period, and down payment requirement. The minimum required score for an SBA pre-screen is 140.
Your personal finances are just as important as your business finances when seeking a commercial loan. Lenders check this for any signs of financial trouble such as defaults, foreclosures, tax defaults, and court judgments. Credit history also plays a big role in getting approved.
So, what acts as the collateral for the loan? The property seeking finance serves as the collateral; in other words, a lien is attached by the lender allowing seizure of the property if there is a failure of on-time payments. To qualify for a loan, your business will have to occupy at least 51% of the property you are seeking funds for. The makeup of your property can vary from commercial buildings and storefronts to warehouses or labs. If this is not the case, it is better to apply for an investment property loan. If you’re working with a hard money lender, they will usually set loans based on property value alone.
Now that you have a better idea of what commercial lenders are looking for, you can better prepare for the application process! In any situation, it’s important that you come to the lender prepared. Next month, my blog will take a look at how you can best prepare for the application process.