A commercial loan in Indiana is much like a residential loan for the same area, but it is used to finance the purchase of a piece of real estate that will be used as a base for a business or investment portfolio.
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.
Indianapolis, Fort Wayne, Evansville, South Bend, Gary, Hammond, Bloomington, and other cities in Indiana make excellent places to purchase commercial property. These areas have high populations and often high property values, which can make real estate a valuable asset for your company or portfolio.
The U.S. Small Business Administration, or SBA, offers affordable financing opportunities to help small businesses grow. The Indiana SBA District Office is located in Indianapolis. 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 Indianapolis SBA District Office: 317-226-7272.
A diverse state with a few large urban areas and a number of smaller industrial cities, Indiana is known nationally for its sports teams. Indiana has a long history of auto racing and basketball. The Indy 500 is an annual racing event that takes place during the Memorial Holiday Weekend. Indiana has a basketball tradition unlike any other state in the nation.
A high percentage of Indiana's economy comes from manufacturing. Besides this, Indiana is home to international headquarters of major pharmaceutical companies such as Eli Lilly. The economy in Indiana is considered to be one of the most business-friendly in the U.S., with low business taxes, a conservative business atmosphere, and fairly low union membership.
The capital of Indiana is Indianapolis. Indianapolis has a large number of municipal parks. The flagship Eagle Creek Park is among the largest urban parks in the country. Museums include the Colonel Eli Lilly Civil War Museum, the Indianapolis Motor Speedway, and NCAA Hall of Champions. For anyone who loves sports or enjoys a friendly business climate, Indiana is an excellent place to pursue commercial real estate. Lender411 can help you find the best commercial mortgage rates.
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