Commercial Loan Basics You Should Know
 

The key to successfully obtaining a commercial loan is knowledge. In this article, we conduct an overview of commercial loan financing and basic information one should know when considering commercial financing. 

A commercial loan is simply a loan made for business purposes, rather than individual needs. A mortgage for your home is a personal loan. A mortgage for a new office building for a business is a commercial loan. The primary thing to keep in mind is that an individual is the primary focus of a personal loan while the focus for a commercial loan is either the business or asset to be obtained. For instance, a lender will analyze cash flow, expenses and so on of an income producing property like an apartment building when considering a commercial loan. As the borrower and guarantor your personal credit matters, but not nearly as much as the fundamentals of the property finances.

The first thing to understand about seeking out a commercial loan is familiarity. If you are seeking financing for the construction of a new commercial building for your business, you need to apply with commercial banks that have a history of providing such commercial loan financing. Very few commercial banks are one stop shops. Spending the time, money and effort to place an application with a bank that doesn’t write that type of business or only dabbles in it is a bigger disaster than you probably realize. Why? When they inevitably reject the application, it will be noted on the credit report of the business and yourself, which makes it much tougher to get a loan from a bank that does write that type of business.

Key Factors

There are a number of factors that commercial banks consider when evaluating commercial loan applications. The key thing to understand is they are all a measure of the risk in the project and should be viewed as much. Everything you suggest or offer up should be done so with this in mind.

Cash Flow

The initial consideration is cash flow. This can be calculated per the business or asset being borrowed against. Let’s consider an apartment complex. The fact you think it is a good deal is irrelevant. A commercial lender is going to want to see a property that has a positive cash flow if the loan is given. This means documentation will need to be provided that details the monthly revenue divided by all the expenses, taxes and the mortgage payments. Most banks look for a 1.25 to 1.50 cash flow ratio.

Collateral

Collateral is a much bigger issue with a commercial loan than with a residential loan. This can actually help you. Additionally, you can often use other business assets to "cross collateralize" a commercial loan you are seeking and that the bank might not otherwise give.

Debt to Equity

This is a ratio that represents your total capital assets versus the debts of the business. The bank wants to see a controlled debt situation. If your debts are more than 5 times your capital, it is going to be difficult to get a commercial loan.

Management

Does the management of the business have any previous experience with this type of transaction, business niche and commercial loan? How did it go? Remember, we are talking about risk assessments. A bank is going to be much more comfortable providing a commercial loan to a business with experienced management versus a group doing it for the first time.

What is the best method for successfully applying for a commercial loan? Get experienced help and find a licensed mortgage broker that specializes in commercial real estate loans in the US, Mexico and the Caribbean.  It can make the difference between getting the commercial loan financing you need and watching a project go down the drain. Contact the experienced commercial loan specialists at WestshoreMortgage.com for a free commercial loan feasibility review and consultation.