Are you a small business owner who needs to expand your facilities, or are you a new investor who wants to dip your toes into the commercial real estate market but needs to place company offices on the property? In either case, you need a commercial property loan. However, these loans differ significantly from residential loans. These are a few tips for gaining approval on your commercial loan.
Repair Your Personal Finances
You may have gone to great lengths to separate your personal and business finances. This is necessary to protect yourself from any liability your company may encounter. If you have also built credit for your company, you should be in great shape. However, if you don’t have adequate company credit or your company is relatively new, lenders will still look over your personal finances before approving a loan. Financial institutions will check your credit for foreclosures, tax liens, defaults and court judgments. They may even deny your loan if your personal credit score is low. Therefore, take some time to repair your personal credit before pursuing a commercial property loan.
Analyze your Business Finances
Your company’s finances will undergo a lot of scrutiny during the loan review process. Therefore, you need to ensure that your cash flow is strong enough that you are able to repay your loan. In addition, your debt ratio should be relatively low as it predicts your ability to pay your current debt and interest. Your net operating income will also be reviewed.
Then, your business’s credit score will be analyzed. Your credit will determine your ability to access any type of commercial property loan and will determine the best terms you may be offered. Be sure your business structure offers you limited or no liability protection. Also, if your business credit score isn’t great, you may look into alternative loan sources, such as the Small Business Association.
Choose the Right Property
Any property you purchase with the loan will become the loan’s collateral. Therefore, financial institutions carefully review the property’s characteristics. For example, they need to know the exact value of the property, including any buildings that are on the land. If you are looking for a commercial real estate loan, not an investment property loan, your company must occupy at least 51% of the property or building.
You may also pursue hard money loans that are entirely based on the value of the property rather than your creditworthiness. However, your loan will typically be no more than 65-80% of the appraised property value.
Whether you hope to expand your current company headquarters or move to another location, you may need a commercial real estate loan. Do your due diligence to find the best loan terms.