What Lenders Look for in Commercial Real Estate Loans

Small business owners and investors use small commercial properties nationwide to support and run their businesses. These types of assets are quite valuable especially when you need a loan to help realize your vision. However, before you consider applying for commercial real estate loans, there are a number of things you have to understand about these types of loans.

What are they?

Commercial real estate loans are used to buy or give a commercial property a face-lift (renovate). These loans are only available to businesses. Lenders call for the property to be owner-occupied. This means your business must be occupying at least 51% of the property. There are many types of commercial loans you can apply for.

What Lenders Look for?

When offering these loans, lenders have three key sets of requirements they consider before granting the loan to a small business. The requirements relate to your business’ finances, personal finances, and the characteristics of the property.

Business Finances

Unlike residential mortgages, commercial real estate loans require a lot more scrutiny. This is because small businesses are thought to be high risk and may not end up succeeding. Lenders will scrutinize your books to ascertain that your business has the required cash flow to service the loan. The lender will also calculate your company’s debt service coverage ratio. This is the annual net operating income divided by the annual total debt service. In most cases. The minimum requisite ratio is 1.25.

The credit score of your business will also be looked at. This is done to determine your access to commercial loans and the terms that are most suitable. Moreover, your business has to be structured as a limited liability entity because a loan to a sole proprietorship is considered a personal loan and not a commercial loan.

Personal Finances

Given that small businesses are managed by the owner or a few partners, lenders will want to take a look at your personal credit score before giving you commercial real estate loans. They check if you’ve had financial problems in the past such as tax liens, foreclosures, defaults, or court judgments. A low personal credit score will significantly reduce your business’ chances of getting a commercial loan.

Property Characteristics

The type of property determines how much you will be awarded. This is because the property acts as collateral. Commercial buildings used for general capacities like office space or warehouses are much easier to finance than properties that are built for a specific purpose such as a manufacturing plant, bowling alley, or bank. This is because buildings built for general use have an inherently lower risk because of high market demand from investors. Lenders mostly avoid financing specific use properties or require a higher down payment on them in order to offset the high-risk profile.

These are the three key considerations that are made by lenders when calculating commercial real estate loans. When approaching a lender, it is good to know how much they can offer. You also need to pay attention to the terms and conditions before signing anything. 

If you are looking for real estate financing, ABO Capital can take care of all of your needs. Whether you are looking for a commercial real estate loan, or a residential real estate loan, we will take care of it for you. If you are ready to apply, you can fill out the application and we will be in touch soon.