HOW TO GET A LOAN FOR BUYING COMMERCIAL PROPERTY
A commercial estate loan is used to renovate or buy a commercial property. Typically, business owners apply for this kind of loan when they want to add a new facility such as a new office, store, or warehouse. Or they could use the loan to expand their existing site which pushes a small business into a medium-sized or large operation. Being able to access this loan depends on a variety of factors which is dependent on the lender.
Most lenders will require that the property is occupied by the owner, meaning the business occupies at least 51% of the commercial space. Getting a commercial real estate loan first begins by deciding on which kind of commercial loan you will apply for before narrowing down the choice of lender.
WHAT LENDERS LOOK FOR
Lenders for commercial estate loans will require three requirements before granting the loan. These are business finances, personal finances, and the characteristics of the property.
Business Finances
Compared to residential mortgages, commercial real estate loan applications are under heavy scrutiny from lenders. Generally, smaller businesses are considered too risky and banks will deny any application if your business doesn't have the necessary cash flow to pay the loan.
Lenders are going to calculate your business' debt service coverage ratio which is the annual net operating income divided by the annual total debt service. You will need to have a ratio that is 1.25 or higher to qualify for the loan.
Personal Finances
Small businesses are usually under the control of a single owner or very few partners. Banks and lenders will want to verify your personal credit score as well as credit history to make sure you don't have any financial issues in the past such as foreclosures, tax liens, court judgments, and defaults. If you have a low credit score, that could jeopardize your chances of approval for the loan.
Characteristics of the Property
The property that you are going to use the loan for will act as the collateral. Commercial lenders will attach a lien to the property which means they can seize it if you fail to repay the loan in time. In order to qualify for a commercial real estate loan, the business has to occupy at least 51% of the building. If not, you should be applied for an investment property loan which is common within rental properties.
Some lenders will base the loan exclusively on the property value as opposed to the borrower’s credit score. The property can be a storefront, warehouse, laboratory, commercial building, and other commercial property. Family residences don't quality, especially single-family homes. A multi-family property, on the other hand, might if that is your business' base of operation and occupies at least 51% of the building.
PREPARING FOR APPLICATION
To apply for a commercial real estate loan, you need to have a lot of documentation. Generally, banks and private money lenders will need the following:
● the last five years of tax returns
● books, records, financial reports for the last 5 years
● projected cash flow for the entirety of the loan
● credit reports of the business
● state certification
● third-party appraisal
● business plan
● proof of citizenship
WHERE TO APPLY FOR THE LOAN
There are multiple sources to apply for a commercial real estate loan. Doing a little bit of research on each one of these can inform you of the best one to choose.
Banks
Commercial Lenders
Private Money Lenders
SBA 504 Loans
SBA 7(a) Loans
Author: Eliza Brooks