If you are thinking about purchasing a commercial property to either set up a new facility such as a store, office or warehouse, or to expand an existing one, you must think carefully. This is often a major commitment for a small business and you should tread carefully to ensure desired results. If you do not have the funds or the capital to do it on your own, the only way to go about doing it is with help of a commercial real estate loan.
Your access to this kind of loan, which in some aspects resembles a residential mortgage for business property depends on several factors that vary according to the type of loan you seek. It is also important to know that when you apply for a loan, you should have a good idea of what the lender is looking for as it is his money that is at risk.
Commercial real estate loans are mostly used for purchasing and renovating commercial property and lenders require the property to be owner-occupied, meaning that your business will have to occupy at least 51% of the building. To convince the lender and secure the funding, you will also have to decide on the type of commercial loan you need, depending on the property and business, and prepare for application to get your loan application approved.
What the lenders look for?
Lenders typically have three sets of requirements before they agree to a commercial loan for your small business. These requirements are related to your business’s finances, your personal finances and the characteristic of the property you require financing for.
Business finances
Commercial real estate loans require a lot of scrutiny. It is because small businesses are considered risky, and many of them end up in failure. Banks and commercial lenders want to look over your books to verify your business has the cash flow necessary to repay the loan.
The lender will calculate your business’s debt service coverage ratio, which is defined as your annual net operating income (NOI) divided by your annual total debt service. This is the amount you will have to spend paying back principle and interest on your debt. The lender must be satisfied with your business income before agreeing to a loan.
Business credit
The lenders focus on your business’s credit score to assess your credibility and how well you can do. They will check out the interest rate, payback period, down payment requirement to gauge if you will be able to pay back the loan within the given timeframe. You need to work on business credit before applying for a loan. There are many lenders that provide loans to small businesses with lower score than the minimum but it is not easy to satisfy the lender.
Personal finances
In most cases, small companies are usually managed or run by an owner or a few partners. Banks and commercial lenders will want to check the personal credit score and history of the owner or partners. They want to see if you have been through any financial problems in the past, such as defaults, foreclosures, tax liens, court judgments and more as they don’t want their money at risk.
A low personal credit score could impact your chances of approval for a commercial loan. Make sure to improve your personal credit history and financial situation before applying for a loan to avoid rejection as some lenders are very particular about them.
Property characteristics
When you are securing a commercial real estate loan, the property being financed by the loan acts as collateral, and the lender attaches a lien to the property which allows him to seize the property if you fail to repay on time. To qualify for a commercial real estate loan without any problem, your small business must be occupying at least 51% of the building.
If your business does not have the necessary property characteristics, you should be applying for an investment property loan which is more suitable for rented properties.
Applying for a commercial real
estate loan can be a long and slow process that requires a lot of
documentation. You can also go for a hard money loan avoiding the long process
but it requires you to have a worthy property that can be used as collateral.
Improve your chances of getting approved for commercial
real estate loans San Antonio by making an effort to learn what lenders
look for when you apply for financing and how to convince them regarding the
authenticity of your application.
