Few business leaders possess the cash on hand to purchase a commercial property outright or make wholesale renovations needed for success. That’s why lenders provide commercial real estate loan opportunities for qualified borrowers. Many of the options are in place to help entrepreneurs, investors, and companies, improve our economy and garner a lucrative return on their hard work and financial investment. If you are considering applying for a commercial real estate loan, the following information could help fast-track your loan approval.
A commercial real estate loan largely mirrors the products secured by community members to purchase homes. Like a residential mortgage, a commercial real estate loan typically involves a lien against the property for security. Business professionals may apply for a commercial real estate loan to purchase a property, expand an existing facility, or make renovations that further goals.
Many of the available lending options require loan recipients to occupy upwards of 51 percent of the property while leasing less than half. Required down payments, interest rates, and terms vary significantly among lenders. And it’s not uncommon for corporations, investors, trusts, developers, and entrepreneurs to seek a commercial real estate loan product to help further their business.
A commercial real estate loan typically undergoes strict scrutiny because a fair amount of businesses fail, and lenders need to be certain they are financially sound in an event that a loan goes unpaid. Lenders that offer commercial real estate loan products generally consider three sets of requirements when processing an application. These involve the state of a company’s finances, the applicant’s finances, and characteristics specific to the property.
Potential borrowers can anticipate a thorough review of the corporate books, a hard credit pull of their personal history, a review of the business history and trends, and a recent property appraisal. All of these moving parts are evaluated to determine the ability to repay the loan and ways a lender can recover money should the organization falter.
A commercial real estate investment or infusion of cash can positively affect the trajectory of a company. Using the revenue to make improvements or expansions generally helps an outfit increase profitability. And on top of the added income, property values may increase substantially. That’s why it’s crucial to take the following proactive measures to ensure your commercial real estate loan gains approval.
Lenders that offer commercial real estate loan products routinely review the “debt-service coverage ratio.” This metric compares the property’s existing debt against the net operating income. The point of this measure is to see hard numbers indicating the ability or inability to repay the commercial loan consistently and on time. One of the ways business leaders can improve their approval chances involves reducing debt and, subsequently, improving the debt-service coverage ratio.
While there are a wide range of factors to consider when processing a commercial real estate loan application, creditworthiness remains a baseline measurement. Applicants who are applying or are acting as personal guarantees for a secondary source of repayment should have a preferable credit score of 650 and higher to secure approval. Business credit scores will also be reviewed as the loan application is reviewed, and those are typically ranked between 1 to 100 and associate a higher score with good business credit.
Before applying for a commercial real estate loan, request a free copy of your personal and business credit report from the reporting agencies. Review the documents for any errors of items that should have timed out and have them corrected. Then look at areas you can improve your credit score in 30 days or less, such as debt-to-income ratios or paying off credit card balances. Raising your credit score improves the chances of a commercial real estate loan approval and opens doors to lower rates and favorable repayment terms.
When a lender processes any type of loan product, a major factor involves risk. Local lenders must feel confident the prospective borrower is fully invested. The lender also needs to see a pathway to recovering the revenue in the event of a default. One practical option is to include other hard assets for security. By reducing a lender’s risk, applicants improve their approval chances.
Consistent with the concept of lower a lender’s risk, distributing responsibility to other investors or adding a cosigner or personal guarantees accomplishes that same goal. The conventional thinking revolves around debt collection. Recovering the entirety of a commercial real estate loan from one party can prove challenging. But when multiple people are impacted, the likelihood of repayment and recovering revenue improves.
Although business visionaries see a robust opportunity to build a business or improve profits, sometimes it makes sense to take baby steps. Consider discussing your financial situation first with your local credit union. You may be able to get pre-approval to help you identify realistic borrowing parameters. While you may recognize an excellent opportunity, a less expensive property may better serve your long-term financial goals.
A commercial real estate loan down payment traditionally runs between 15 and 35 percent. Higher down payments reduce lender risk and put more of the borrower’s skin in the game, so to speak. This strategy speaks loudly to the borrower’s commitment to repaying the loan. If you need your on-hand cash to achieve business goals, providing a lower down payment can be a viable option. But is important to understand borrowers may assume a higher accompanying interest rate as well.
If you are considering purchasing a commercial property or need money to improve an existing one, speak with a local trusted loan professional about available commercial real estate loan options.
At Carolina Trust Federal Credit Union, we know that sometimes, you need a little extra money to maintain and grow your business, and we get it. Whatever it may be, don’t worry— we’ve got a loan for that.