Commercial loans are all about risk. Lenders are looking for some very specific criteria before they are willing to approve a loan application.
Commercial loans are more difficult to get than consumer loans because they are often for a much larger dollar amount. Lenders are in business to make money and that means that they must be very selective when lending a large sum of money. Understanding the criteria that lenders use to evaluate applicants and why they have these standards will help you to tailor your documentation to these criteria and show lenders all of the right information about your business.
Lenders are first and foremost concerned with your ability to repay the loan that you are requesting. They want to see long term documentation in the form of profit and loss statements, bank statements and tax returns to demonstrate that your business is financially stable. The might also want to see documentation about other credit which has been extended to your business. This could be in equipment rental, from a supplier of materials, from a property that has been leased or from a vendor. Lenders also favor a borrower who has some cash in savings to cover expenses in the event of a slowdown in business and revenue.
The next big interest for a lender is that the commercial property that you are purchasing has a value greater than the loan which you are requesting. This is because the property will serve as collateral for the loan. In the event that you default on the loan, the lender will take possession of the property and sell it to cover the outstanding balance of your loan. In most cases the loan will only be approved for about 80% of the property’s current value. This is due to the volatility of commercial property values. Having that instant equity in the property assures the lender that even if the property value drops, the loan will still be adequately secured.
Becoming a Personal Guarantor
In some cases a business entity does not have sufficient credit history to demonstrate financial stability. When that is the case commercial loans are secured by a personal guarantor which is normally the owner of the business. The owner needs to be able to demonstrate to the lender that their personal assets and money can be used to cover the loan payments. Again, the lender will need to see documents including bank statements, tax returns and personal net worth statements to verify the guarantor’s finances.
Understand the Lenders Goal
In almost every case, a lender is simply looking at numbers to determine if a loan applicant is a good risk. Knowing this information, it is critical that you show repeatedly that the business is financially stable, has a strong and steady stream of revenue and that you are also financially stable. In addition showing that the business has sufficient cash reserves to bridge a short term cash flow issue will give the lender added confidence in your ability to repay the loan that you are requesting. Approval for commercial loans is based on ability to repay the loan and the financial stability of the business in almost all cases.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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