When we talk about investing in a commercial estate or purchasing new office for your business, it automatically means big money. That is why finding a commercial mortgage with favorable terms should be one of your top priorities.
Taking out a mortgage and relocating to a new office is a big move for every business owner. This makes it essential for them to get a hang of the entire process so that they can be in a position to negotiate the best interest rate and loan terms on the loan. This allows them to save more capital for their business.
When business owners approach a lending institution, they have their business and financial information in order. Unfortunately, that is not enough. A commercial lender must analyze several areas before giving the final nod for the loan.
Do not have a clue about the specific areas which financiers look into? Don’t worry, our Commercial Mortgage Guide will help you out! Even though every case is unique, here are the common questions lender raise when you apply for commercial property loan:
- Personal History
Despite many loans being non-recourse (which do not require personal guarantees), lenders need to know who they are working with. This makes it important to demonstrate your investment or entrepreneurial skills with respect to income-producing properties. Bank statement, resume, bio, etc. are used for evaluating the same.
The lenders will verify every minute detail to be absolutely certain that you are credit-worthy and will be able to pay back what you borrow. In case you have some ‘black spots’ in your past, such as foreclosure or bankruptcy, then you must clean with your lender.
Such unfortunate events are difficult to get away with. If you do not mention your past and the lender finds out, you will have a hard time explaining why you didn’t discuss it in the first place.
Generally, lenders prefer to fund seasoned individuals who have ample of experience in managing assets. But if this is your attempt, then you should have a ‘deep bench’ team which can add on to your competency and management skills.
First timers usually find it difficult to convince the lenders that they are capable of not just modeling operating performance but also dealing with inevitable everyday hurdles commonly associated with commercial estates.
After all, even lenders do not want a foreclosure as it forces them to manage the asset secured as collateral. They are lenders, not real estate managers. Hence, it is vital that you market yourself as an individual who is well-versed with operating metrics of the asset class.
- Credit Condition
In the last couple of years, FICO credit score has become one of the most important criteria to ascertain the borrower’s credit-worthiness. It is the foremost thing which lenders check every time someone applies for a residential or commercial mortgage.
This is the reason why it is always advised to check your credit score before you apply for a loan. In case your score turns out to be less than 700, then you need to work on it. You can refer to one of our previous blogs for the same.
- Financial Ratios
Besides credit score, lenders also check the financial or accounting ratios to evaluate strength, weakness, and profitability of a business. Many entrepreneurs calculate them on their own before approaching a lender so that if any improvements are required, they can be made.
* Debt Ratio
It is calculated by dividing the debt capital by total assets. The ratio highlights how much a company depends on debt to fund its assets. The lower the debt-to-asset ratio, the better are the odds of getting approved for the commercial property loan.
For instance, a firm with $100,000 in assets with $50,000 debt is better than a company with a million dollars in assets along with $750,000 in debt.
* Debt Service Coverage Ratio (DSCR)
DSCR can be calculated by dividing a business’ Net Operating Income (NOI) by the total debt. It is used to determine how able a business is in generating sufficient revenue to pay off the mortgages.
If a business has an Operating Income of $100,000 and debt of $60,000, then the DSCR rounds off to 1.67. It means that the firm operates with a healthy excess of 66% revenue over the expenses. Any ratio over 1 is considered safe by lenders.
The Bottom Line
As with any other business loan, make sure you look around and collect as many quotes as possible from various lenders. Only sign the dotted line for the most cost-effective option in the long haul. The current Commercial Real Estate Financing scenario in California completely favors new entrants. All you have to do is make your move and reap the benefits. Good luck!