If you want to purchase a new property to operate your business from or want to expand your existing business, you will be looking at commercial real estate spaces. This will often need you to source a commercial real estate loan.
For most companies, finding a commercial real estate loan is a task as the property values of commercial real estate is high and it becomes difficult for small to medium scale businesses to cover up such huge expenses. These loans are also generally used to purchase or to renovate an existing commercial space.
With many options that are available in the market from where you can fund these loans, it might get tricky to find the best one. Here’s an overview of the things you should know about commercial real estate loans, what are the qualifications you need to fulfill to get a commercial real estate loan and the tips you can follow to increase your chances of qualifying for a commercial real estate loan. Read on.
Things you should know about commercial real estate loans
In comparison to other types of real estate loans, procuring a commercial real estate is a more comfortable deal – as there are a plethora of options to choose from and a variety of lenders including private money lenders, banks, financial institutions, REITs who have different loan options for commercial real estate loans.
So, all you have to do is to do your research on the best kind of loan source that will perfect your financing needs the best, and narrow down your choices.
The second thing you should know about commercial real estate loans is that lenders typically require that the property be owner-occupied – meaning that you should use more than 51% of the commercial real estate property space to run your business.
This is true for all the types of loan sources that you have, and it’s a general requirement. The next thing to know about commercial real estate loans is about the needs lenders have to provide you a commercial real estate loan.
What are your lenders looking for concerning funding your commercial real estate property?
1) The numbers of your business or how much your business is making?
One of the first things lenders would look for before funding your loan would be the books of accounts to get a picture of how much you’re earning. This is done because small businesses are generally a risky deal, and there are more small businesses making losses than the ones that are running in profits.
This makes lenders cautious about who they’re lending their money to, and thus they’ll want to check your bank statements to be sure of your cash flows.
2) The second thing your lender would look at is the debt service coverage ratio
Debt service coverage ratio is the net operating income of your company divided by the debt service charges (The total amount to be paid towards repaying the loan principal and the loan interests put together.) Typically, a debt service coverage ratio of 1.25 is considered to be good to go.
Let’s say you want a loan of $100,000 to fund your commercial real estate property; your lender would like to see a net operating income of at least $125,000.
3) The credit score of your business
Most lenders typically require your business to have a credit score of 150 and above. However, there are exceptions to this. You can still find lenders who will be willing to fund your property even when your credit score isn’t very great. And if you choose to work with private money lenders, it is more likely that they are interested in the value of your property more than they are about your credit scores.
4) Lenders generally require an LTV ratio of 70% to 80%
Loan to value ratio defines the amount you are required to bring in as part of a down payment in your business. In a typical scenario, lenders expect the LTV ratio to be 70%.
For instance, if the property value of your commercial space is $100,000, lenders would require you to bring in a down payment of $30,000 with an LTV of 70%.
What are the qualifications you need to fulfill to get a commercial real estate loan
Explained above were some of the basic things one should know about commercial real estate loans.
Moving on, here are some of the qualification requirements that are put down both by private money lenders and the banks or financial institutions when they consider your loan proposals.
Here are some of the common Commercial Real Estate Loan Requirements.
Commercial real estate loan Qualifications
- Tax returns of your business of the past five years or from the year since the inception of the business.
- Financial books, books of accounts, and records of the transactions of the business of the past five years or from the year of the inception of the business, whichever is shorter.
- Details of all the non-balance sheet nature of transactions like the leases taken or capital gains or losses, which may be out of the ambit of the records of the financial statements.
- The credit reports of the business.
- The credit reports of all the partners or owners in the business – These refer to the personal credit scores and takes into consideration the facts like the previous bankruptcies, foreclosures, or defaults. The reason this becomes important to lenders is that small businesses generally are formed only by a small team of owners or partners and their personal credit histories can impact the repaying abilities of the business.
- The state certification that your business is a corporation or a limited liability entity.
- The cash flows of your business, as projected for the entire period of your loan.
- An appraisal of the property as given by a third-party.
- The proposed business plan as to how the concerned commercial real estate property will be put to use.
These are some of the basic Commercial Real Estate Loan Requirements as required by your commercial real estate lenders. How can you better your chances of qualifying for such loans? Here are some pro tips.
Tips you can follow to increase your chances for qualifying for a commercial real estate loan
It is important to note that there is NO sure shot way to ensure your business will qualify for a commercial real estate loan. It depends and varies from one lender to another, and there are no hard and fast rules that are uniformly applicable across.
However, by following these tips listed below, you can increase your chances of qualifying for a typical commercial real estate loan:
Looking at ways through which you can increase your credit score – both that of your business and the credit scores of individual business owners or partners involved in the business.
One of the first things to do to increase your credit score would be to pay off your existing debt liabilities as soon as possible and in as fewer installments as possible.
One other way of improving your credit score would be to avail a couple of small short term loans and paying them off at the earliest. This way of improving your credit score might take some time, but it sure does help improve your score to a great extent.
Offer to pledge some additional collateral to the loan. At the end of the day, behind all these commercial real estate loan requirements, your lenders are looking for the surety conveying you can repay the loan along with the interests and other loan-related liabilities.
If you’re able to provide them more sense of security that you can pay off your loan on time without defaulting, there are chances that they’ll approve your loan request even if you fail to meet a couple of loan requirements.
One such easy ways to build in that trust and credibility and provide a sense of security to your lender is to offer to pledge additional collateral, over and above the commercial real estate property.
Agreeing to bear a larger down payment than the usual. If you want to get your commercial real estate loan at the earliest, you should offer to pay up a larger down payment, which will increase your chance of loan approval.
Propose a solid business plan that will convince your lenders that you know how to get the money rolling in after you’ve procured a loan. This helps provide them a sense of security. To be able to do this, drawing an achievable solid business plan is very important and do not overlook this most important step. It appears small, but it has a great impact on your lender’s decision to fund your loan or not.
These are some pro tips you can use to increase your chances of being qualified for a commercial real estate loan. Make a note of checking and exploring the various options you have in the market – both for choosing the type of commercial real estate loan (as there are various types of commercial real estate loans) you want to procure and the loan sources you want your loan to be funded from