4 Ways To Improve Your Chances Of Getting A Commercial Real Estate Loan

4 Ways To Improve Your Chances Of Getting A Commercial Real Estate Loan

Business

Whether you are planning to purchase a commercial property to set up a new facility such as a hotel, a retail store, or an office, or to extend an already existing one, you will most likely need a commercial real estate loan to do so. 

In general, this type of loan can be especially useful to small business owners who need additional capital to cover the costs of acquiring or renovating a building without paying upfront. Rather than waiting to have more working capital on hand, commercial loans for construction and other real estate purchases can make an owner’s plans a reality sooner than expected.

However, before you get the capital you need, your lender has to first consider several factors to ensure you qualify for a loan. In this post, we outline four lender-approved ways to help increase your chances of getting the commercial real estate loan you need.

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Ensure you have plenty of income

When you are applying for a commercial real estate loan, lenders want to see that you have enough income relative to your expenses so they can ensure you can make your loan payments every month accordingly. 

For instance, if you borrow DSCR loans to finance the purchase of multiple different property types such as multifamily properties, commercial office spaces, hotels, and resorts, your lender will use your debt-service coverage ratio to ensure you have enough cash flow to service your debt. In fact, most business lenders require their borrowers to have a DSCR higher than 1.00, as it provides them greater security that the borrowers won’t default on their loan payments. 

Improve your business credit score

Another way you can increase your chances of getting a commercial real estate loan is to improve your business credit score. Your lender will closely examine your business’s credit score to determine your eligibility for a commercial loan and the terms that apply such as the interest rate, payback period, and down payment requirement.

In general, the minimum required credit scores vary by lenders, but you’ll need 640 or higher for approval. In addition to checking your credit, your lender will also want to know how long you have been in business so they can assess your credit risk.

It is important to note that in some cases lenders will ask business owners to provide a personal guarantee, meaning they will also check the owner’s personal credit as all.

Assess your space needs

Assessing your space needs ahead of time can also help improve your chances of getting a commercial real estate loan. In fact, lenders want to see evidence of solid planning in which you will have calculated your budget accordingly and outlined how you will accommodate projected growth.

For instance, when determining your budget, you shouldn’t be focusing only on the purchase price, but also consider the additional costs associated with the property. If you overlook or underestimate expenses such as due diligence costs, renovations, legal fees, recurring operating expenses for the property, or production downtime during the transition, you will certainly decrease your chances of getting the commercial loan you need. 

So, make sure you prepare an effective budget for your commercial real estate purchase in advance.

Prepare the necessary paperwork 

Because the application process for a commercial real estate loan can be long and time-consuming, it is imperative that you prepare all necessary paperwork ahead of time. Otherwise, you are risking your chances of delaying the process of getting the commercial loan or even reducing your eligibility to obtain one.

Typically, banks and lenders will require you to provide the following documentation:

  • Business tax returns;
  • Your financial reports;
  • Last three months of bank statements;
  • Details regarding collateral;
  • A third-party appraisal of the property;
  • Business plan.

For instance, a solid business plan isn’t only necessary when seeking financing for your project, but it also serves as a management tool that outlines exactly what your company will do and how it plans to succeed. 

Final thoughts

If you are a young entrepreneur who is planning to buy commercial real estate, then you will most likely need a commercial loan to get started. Securing such a loan can enable you to afford a property that otherwise would have been difficult to reach if you don’t have enough capital on hand. 

However, in order to get the loan you need, there are several factors you should take into consideration that can help increase your chances and qualify you for obtaining a commercial real estate loan.

Business

4 Ways To Improve Your Chances Of Getting A Commercial Real Estate Loan