Factors Your Lender Will ConsiderFind Out How Your Lender Will Evaluate Your Commercial Loan Application and Get Prepared If you want to secure a commercial loan to purchase commercial real estate, you'll have to convince your lender that you're a worthwhile credit risk. This is true whether you need property for business or investment purposes. Commercial real estate is a competitive marketplace. Read through our checklist of factors your lender will consider when deciding whether or not your request for funds is convincing, and adjust your application accordingly to improve your chances of success. Your personal income. Many entrepreneurs who take out commercial property loans do so in their own names at first. At a later date, this debt may be transferred to the business entity. If you're one of these startup business owners and you're planning to take out a commercial loan, you'll need to show that you have sufficient personal income to cover the payments, as your business is likely not operating on a cash flow basis yet. Your credit and the credit of your business. If you are borrowing the money in your own name, your personal credit score will play a major role in deciding whether or not you receive financing. If you're purchasing the property through a business entity, your lender will analyze the credit score of this entity to make the decision. If your business is less than three years old, though, the lender will also check your credit score and the scores of any other principal or managing partners or owners. The income potential of the property. This is the most important factor your lender will look at when analyzing your loan request. You are asking your lender to go into business with you as a strategic partner, so to speak, and before your lender agrees to this, the bank will need to conduct a thorough inquiry into your financial situation and earning potential. Your lender will ask, "Is your company worth partnering with?" If you can't convince your lender that the answer to this question is "Yes," you'll have to look elsewhere for financing. The debt coverage ratio or DCR is a common ratio lenders analyze when determining the income potential of a property. The ratio shows whether the expected monthly net income a property will produce is equal to, lesser than, or greater than the amount of debt you plan to take on to purchase the property. The way this ratio turns out will dramatically impact your ability to get a commercial loan. The risk associated with your business and your industry. In high risk environments, such as emerging markets, many lenders may require higher cash reserves or a lower loan-to-value ratio. Other lenders may simply require better credit. Either way, financing a commercial property in a high risk region or industry can be difficult. The property type. Different property types come with different amounts of inherent risk. Office buildings are often considered the best type of property to finance because they carry very little inherent risk. Lenders will provide better financing arrangements for office complexes than for some other property types. Churches and gas stations, for example, are often unattractive to lenders because of the amount of red tape buyers must wade through before turning a profit. Potential environmental issues may also give lenders cause for concern. In short, the type of property you need to finance is a major factor that will affect your commercial loan success. |
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