A commercial loan in Minnesota can help you get a head start on funding your business. One of the first things you need to consider when opening or expanding any company with a physical presence is the location where the company needs to be situated.
There are many different types of commercial loans. The type depends on the purpose of the property being purchased. A commercial loan could finance a hotel or motel, light industrial building, marina, apartment building, auto services building, bed-and-breakfast, mixed use property, mobile home park, multi-family unit, office, campground or RV park, convenience store, gas station, health care center, retail space, self storage compound, warehouse, or restaurant. Here are some of the most common types:
Traditional Purchase Loan
Purchase loans have fixed or adjustable rates, much like a residential mortgage. Interest rates are contingent on loan-to-value ratio, or LTV, and the property is used as collateral. There is some relative flexibility where credit and income is concerned with traditional commercial purchase loans.
Outstanding credit and high, steady income is often required for bridge loans, since they offer immediate capital on the short-term - typically one year - to suit a commercial project's beginnings, often from a private lender. Longer term financing should be pending while these short-term funds are borrowed.
Most used among lasting retailers and stable offices, the participating mortgageholder gives the lender a cut of the business or real estate revenue along with interest and principal payments every month.
Usually offered by private lenders because of their substandard requirements, hard money loans carry unusually high interest rates since they are particularly high risk. The property serves as the collateral for financing.
Credit and NOI
Commercial loans typically have strict credit and debt requirements, although the spectrum is wide thanks to the flexibility many private lenders offer. To have a credit (FICO) score of 700 or higher is ideal, but certainly many commercial loans have been approved for borrowers with credit in the 680 to 700 range. There is hope for borrowers whose credit is even lower, but lenders will look for compensating factors, such as a high net operating income (NOI), which should surpass the monthly mortgage by at least 25%.
Debt Service Coverage
Another factor lenders will examine is borrower debt service coverage, which is a ratio of the yearly net operating income over the mortgage payment. Businesses should have a debt service ratio of over 1.25, as determined by a licensed appraiser's estimates.
Debt Yield Ratio
Lenders will also consider a commercial loan borrower's debt yield ratio, which is their NOI divided by the total mortgage loan. A business with an NOI of $500,000 per year and a prospective loan amount of $7,000,000 will have a debt yield ratio of 0.0714, or 7.14%, meaning even if the property is foreclosed out the gate, the lender will receive a 7.14% return.
Commercial lenders, whether for small business, hard money or others can be difficult to find. Lender411 has a number of commercial lenders in its directory. Find one near you by filling out the form at the top of this page.
Minneapolis, St. Paul, Rochester, Duluth, and Eden Prairie are among the most influential and important cities in Minnesota, and it’s here that you’ll find the most commercial real estate available in the state. If you have a plan to start a business in any of these areas or elsewhere in the state, contact a local lender to determine your best course of action. You’ll likely be able to finance your property purchase with a commercial loan.
The U.S. Small Business Administration, or SBA, offers affordable financing opportunities to help small businesses grow. The Minnesota SBA District Office is located in Minneapolis. Generally, small business owners can finance their endeavors in two ways: equity or debt financing.
Small business owners can receive funds through equity financing without acquiring debt. In exchange for ownership share, another company raises funds for the recipient. The SBA recommends business owners take the equity financing route if their business has a high debt to equity ratio; that is, if they have borrowed for their business more than they have invested.
For the opposite case - a business owner has a high equity to debt ratio - debt financing is a safe option, and recommended by the SBA. Debt financing is the borrowing of money from a lending institution or private lender, to be repaid over time, and usually with interest. The allowable loan amount, length of repayment term, and interest rate will vary depending on the lender.
Help Through SBA
Your local SBA office may be able to offer aid through the Financial Assistance Program. Eligibility depends on several factors, although special considerations may be made for franchises, farms, medical facilities and more. Here are the basic criteria for eligible companies:
To see if you qualify for special considerations, contact the Minnesota SBA District Office: 612-370-2324.
Roughly 60% of all Minnesotans live in the Minneapolis-St. Paul metropolitan area. St. Paul boasts the nation's largest mall, known as the Mall of America, with 520 stores and an indoor amusement park. Twin Cities, as St. Paul and Minneapolis together are known, is home to both a thriving business community and a major arts center.
Target, United Health Group, 3M, Medtronic, and Best Buy all have their headquarters in Minnesota. Although less than 1% of the population is employed in the agricultural sector, the state remains a major player in the agricultural field. Attendance at theatrical, musical, and comedy events in the area is strong, which may be attributed to the cold winters and the diverse culture of the area.
For those who enjoy both work and play, Minnesota is the right state for you. Lender411 can help you find thebest commercial mortgage rates.
Are you a mortgage or real estate professional?