According to the Corporate Finance Institute (CFI), a commercial real estate loan is a mortgage offered to businesspeople to purchase or renovate a commercial property. However, it is worth noting that not every business person or business is eligible for this type of loan. To separate eligible borrowers from ineligible borrowers, lenders typically perform a credit analysis on borrowers. Therefore, knowing what a lender wants will enable you to prepare better and increase your chances of qualifying for such a loan. Here’s some more information on this topic.
How to Get a Commercial Real Estate Loan
Before applying for a commercial real estate loan, you first need to determine the type of loan you want, depending on the nature of your business and property. The common types of commercial real estate loans include SBA loans, traditional commercial mortgages, and commercial bridge loans. Apart from being eligible for the loan, the lender will also require you to occupy at least 51% of the property before lending you.
What Do Lenders Look for?
Considering the risk at hand, lenders conduct a loan underwriting procedure to determine your creditworthiness as well as the size of risk. In other words, the lender must be sure of your ability to repay the commercial real estate loan in case they grant you. Some of the factors that lenders typically consider during the loan underwriting process include:
- Credit score – Typically, your business credit history informs the lender about the previous loans you have borrowed as well as your payment information. If you have defaulted on other loans before, you will have a lower chance of getting a commercial loan.
- Collateral – The lender basically uses your commercial property as collateral. In other words, your property will have a lien, which allows the lender to repossess it in case you default on the loan repayments.
- Personal and business finances – The financial strength of your business greatly determine your ability to repay the commercial real estate loan. As such, the lender will look at your net operating income (NOI), which should be at least 1.25 for you to access the loan. If you are running a small business, your personal finances will also undergo scrutiny since the lender will consider your business a sole proprietorship. This means that in case you default on the repayments, your personal finances will also be in jeopardy.
How to Prepare for the Application Process
To prepare for the loan application process, you should collect all the necessary documents, which include, among others:
- Business tax returns
- Business plan
- Bank statements
- Details of the property
- Books and financial reports of your business
- A third-party appraisal of the commercial property
Where to Get Commercial Loans near Me
- SBA loans – The Small Business Administration (SBA) is a federal agency that offers various commercial real estate loans to small businesses in the U.S.
- Hard-money lenders – Usually private companies, hard-money lenders offer commercial property loans based on the property’s value. Considering hard-money lenders have lenient underwriting measures, it is easier for you to qualify for hard-money loans, although you will pay a larger down payment.
- Banks – Lending facilities such as banks also offer commercial real estate loans.
- Commercial lenders – These include non-bank financing institutions such as microfinance facilities and online lenders.
To separate eligible commercial loan borrowers from ineligible borrowers, lenders typically consider the factors discussed in this article. At Fidelity Mortgage Lenders, we can help you secure the right commercial real estate loan to meet the unique needs of your business. To get started, call us today at 800-752-9533.
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