Are you planning to expand your business by investing in a commercial property? Commercial real estate loan is a great way to expand your business. It helps you to easily finance the purchase or renovation of the new or existing commercial property.
It’s an exciting move but equally a stressful one. That’s because the exact mechanics of commercial loan vary depending on many factors.
Indeed, it’s a time-consuming task! But no worries, we will explain to you the ins and outs of commercial real estate loans and how does it work in the real world. So let’s start:
How do commercial real estate loans actually work?
Not many investors know but these loans are secured by liens on the commercial property you are intending to purchase. Wondering what’s a lien?
Well, a lien is a legal right that the property owner gives to the creditor. This works as a guarantee for the repayment of a commercial real estate loan. The lien submits any protection to the lender which can be later used if you default on your loan. Apart from the lien, you should also be prepared to make a down payment on your business property loan. The buyer has to make a down payment of around 20% to 30 % of the purchase cost. This is an important part of the loan process. Next comes the factors that are considered while approving the loan.
Factors lender consider before approving the loan
There are few factors one need to understand before getting into commercial real estate loan. Let’s start with the first one.
1) Business Finances
Commercial real estate loans are considered risky and require more scrutiny. So lenders carefully analyse your cash flow to ensure the loan repayment. Also, the lender will calculate your company’s debt service coverage ratio and business credit score before approving the commercial loan.
2) Personal finances
The next thing is your personal credit score and its history. The lender checks if there was any record related to financial trouble in the past or not. Any financial problem like defaults, tax liens, foreclosures, etc, could influence your loan approval process negatively.
3) Property characteristics:
Lenders usually prefer that the commercial property should be owner-occupied. This means that your business should own at least 51% of the building.
How to get the Loan application ready?
There are different application processes for different lenders. You need to fill the forms correctly with information related to your business, income and the property. Along with the form, necessary documents needed to attest.
● Company’s balance sheet
● Tax returns (business)
● Tax returns (personal)
● Business plan
● Legal documents
Apart from the mentioned documentation, your lender may ask for a few more documents to support your commercial funding process.
So it’s important to be aware of all the legal documents beforehand and submit them quickly to the lender. The quickly you can provide the lender with the necessary documents, the easier you can get the loan approved. Getting a commercial loan approved can be a tedious task. So it’s important to bring a mortgage broker on board to get the right professional help. The mortgage brokers can collaborate with the lenders and use the professional experience to help the investor’s save time and efforts.