Are you a business owner? That’s excellent! It’s understandable the amount of effort gone into building the business into a successful one.
As a business owner, to take the business to the next level, you need money. Say, purchase a new commercial property to set up an additional facet of the business or expand the existing business.
What’s your immediate instinct? Reach out to a local bank and ask them a loan for the business. It’s important to find the right source to gain funds to scale the business.
Banks are known to have a detailed process to guarantee loans for a commercial purpose. Be prepared to be subject to strict demands imposed by the bank as they do not want to take any risks.
Even more, banks tend to ask way too many questions about your business. In simple terms, getting loans approved by banks is never a cakewalk. So, what are your other options?
What if the bank turned down your application or the application never got processed? That’s devastating news for you, right?
Fortunately, banks are not just the only source of lending out funds for businesses or small business owners.
A quick search on the internet should lead you to private money lenders a.k.a. commercial mortgage lenders.
A commercial mortgage is a type of loan secured by any commercial real estate (an office building, commercial building, apartment, warehouse etc.,). While the loan is a lump-sum amount that the lender gives a borrower, a mortgage is a security (a document!) to protect the investment provided by the lender and one that generates interest for the finance they lend for the property.
The document grants power to the lender to seize the property in case of failure to pay them back on time.
As a business owner, you can receive commercial mortgage by pledging collaterals to finance either a new property or expand the existing business/premises.
We can use a commercial mortgage loan to recover business debts. It’s important to understand that commercial mortgage rates are higher than normal residential mortgage loan rates given the increased risk.
Also, the terms and conditions for this type of lending vary as per money lenders. While some traditional banks offer commercial mortgage loans, there are other government-sponsored enterprises, life insurance companies who help businesses with funds. These lenders offer better flexibility interest rate than the banks.
Questions which are asked by the Commercial Mortgage Lender
So, if you have gone with a commercial mortgage lender for securing funds for the business. What’s next? You must begin the application process and during the course, there are answers to certain questions that the lender will want to be sure of before issuing the commercial mortgage.
1. How much money needed? What is the purpose?
Be it in a bank or with a commercial mortgage lender, expect this as the first question when you apply for a loan. The loan amount you request to plays a key role.
Commercial mortgage lenders, especially the private ones, very well know that most cases of borrowers who reach out to them are the ones who were rejected by banks. It’s important they build the right relationship with the borrower and answer for this question will set them up for the rest.
Next important point to consider is the purpose of the loan. For a business, it could be for different reasons like invest in the property improvements, purchases equipment for the business, or to pay off existing debt, and so on. It’s important for the lender to know where the money will be spent by the borrower.
2. What is your credit history (credit score)?
This is one of the most important factors that the lender would want to understand from the borrower.
Answering this question will help the lender in deciding if to offer the loan. It’s important that you maintain a minimum credit score of 680, no personal bankruptcy, foreclosures and tax liens in the previous 5-7 years.
Tip: Different lenders have different terms and conditions for credit history.
Some may require only the business credit history while others have to pull out both personal and business credit reports. Make sure you have both handy when you apply for a commercial mortgage loan. Lenders can let borrowers get their credit scores from reputed sites (Annual credit report, and so on).
3. Will you be able to repay the amount? What will be your repayment schedule?
Primarily, every lender, not just a commercial mortgage lender, would like to know if the borrower can repay the money. This is their main concern factor and they would require anything to give them the confidence you will repay their money.
The money lenders demand an assurance that you either have the savings or the will power to repay them back. Be ready with answers for any outstanding debts or loans that you may have.
It’s crucial that the lender and borrower discuss the loan repayment structure in detail when applying for the loan. With a commercial mortgage, the repayment structures are different.
There are two types of repayment schedules—Immediate and Long Term. Immediate loans have to be paid in 2 years or fewer, while long-term loans can extend to a period of up to 20 years.
Repayment structure could be similar to bank loans (amortizing) where the amount is settled across multiple instalments along with an interest. On the other hand, repayment can be in the form of a balloon loan – one payment to pay the loan principal amount.
4. What is the property?
Lenders first try to understand the property, its use and how the borrower will use the property. They also inquire about the value of the property, when the borrower purchased it, what amount they paid, the current worth of the property, and the present condition.
Most lenders prefer the property to be in suburbs or across metropolitan areas. They will perform an assessment with the help of reputed organizations to know the actual property value.
Tip: Be sure to provide the right information to the lender for a hassle-free process. If you have existing mortgages on the property, make sure you let the lender know about it and provide details to support the claim.
Lenders also look at the LTV ratio (Loan to Value) in case of business or commercial mortgage loans. LTV ratio calculates the value of the loan amount given by the lender against the purchase value of the (pledged) property. In common, lenders require borrowers to make a down payment of about 30% of the purchase price of the property.
What this means is that the borrower covers 30% of the cost and the lender takes care of the remaining 70% by giving the loan amount. Here, the LTV ratio is 70%. There’s no fixed amount that needs to be made as a down payment.
The more you pay, you will need a lesser loan from the lender, and you can maintain a lesser LTV ratio. This becomes easy and less risky for the lender.
Tip: Have a higher limit of what you can repay the lender every month. This will help you to put in the right upfront down payment and maintain a lower LTV ratio.
5. Details of a company’s financial performance over the years
Some lenders will demand information and proof about performing your business over the past few years. Few of the key documentation required are –
· Audit reports verified by the company auditor for the previous two years
· Bank statements (minimum of previous six months)
· Profit and loss statement for the financial year
· Business plan and growth projections for the future
Most commercial mortgage lenders also consider the Debt Service Coverage Ratio (DSCR). DSCR is nothing but the amount of cash flow available in the business to pay the current debts.
DSCR is the actual principal amount plus the interest you pay on the debt. Lenders expect the business to have a healthy DSCR of at least 1.25. Say, your loan value is $200,000, lenders demand your annual net income to be $250,000.
6. What is your business liquidity?
In simple terms, lenders will look for how much liquid cash you have in hand and the cash flow into your business. Depending on the liquidity factor, lenders can arrive at a realistic number for the loan amount and the LTV ratio.
For example, if you are expecting a loan amount of $200,000, you must have at least 10-20% ($20000-$40000) as cash liquidity post the loan closure.
Private Capital Investors – Your Commercial Loan Specialists
For a business, applying for a commercial mortgage loan for a new property or developing the existing infrastructure is definitely a huge investment.
The process is neither simple, and it takes anywhere between 60-90 days to qualify for a commercial loan. New businesses find it hard to qualify for a commercial loan or get their applications rejected by banks.
When choosing your lender, make sure they have proven experience and track record in delivering loans to businesses wanting commercial mortgage loans.
Private Capital Investors offers investment solutions and capital for businesses and real estate investors nationwide and internationally.
With strong relationships with reputed banks, life insurance companies, CMBs and several private investors, we help businesses to get their commercial mortgage loans approved.
It’s important for businesses to plan correctly, have the required paperwork in place and be sure of what’s available with them to ensure guaranteed loans at the lowest rates for their business.
Want to apply or need information about applying for a commercial loan? Contact Private Capital Investors today and one of our specialists will set up an appointment with you at a convenient time.