Commercial property loans are most often used to purchase or renovate commercial property for business purposes. When you go shopping for a commercial property loan there are a few things that you should know to help with your search.
A commercial property loan can sound intimidating because the totals are typically much larger for business than for personal property. One thing to keep in mind is that most lenders require a commercial property loan to be on owner-occupied property. That doesn’t mean you need to live there but your business will need to occupy more than half of the building.
Not to fret, here are the other things you need to know about getting a commercial property loan.
Net Operating Income
A commercial property loan from Financial Compound is given much scrutiny and consideration before approved because small business can be considered risky. There is a way to reduce that risk if your business has little debt or good cash flow. Typically, lenders prefer both but what they really look at is your company’s debt service ratio which is how much money your business can afford to pay back the loan.
That ratio is determined by dividing your business’s net income by its annual total debt service. You want a ratio above 1.25 to be approved for a commercial property loan. So, if you apply for a commercial property loan of $100k, then your business should generate at least $125k.
Business Structure and Credit
Your company needs to be structured as a business for a commercial property loan. This means it should be a corporation or an LLC. When sole proprietorships apply for loans, they are considered personal loans. One reason for applying for a commercial property loan instead of a personal loan is to protect your personal assets if something happens and you default on the commercial property loan.
Your business should also have good business credit, which is how well and timely you pay back debt. You’ll want a credit score of 155 or higher from the FICO Small Business Scoring Service (SBSS) if you’re trying to get a commercial property loan from the Small Business Administration (SBA) but exceptions can be made, especially in other programs.
Personal Financial History
When applying for a commercial property loan, be ready to have your personal credit history scrutinized. If you have business partners, they will have their credit histories scrutinized as well. Lenders want to know if you’ve had financial problems in the past so they’ll look for foreclosures, payment defaults, tax liens and anything else which may indicate a risk of default. You should have good personal credit before a commercial property loan is considered.
Applying for a Commercial Property Loan
It can be a little nerve wracking running a small business but if you need to expand or renovate, then a commercial property loan may be just what you need. Just be sure to properly prepare before applying for a commercial property loan to improve your odds. Ensure that the company’s debt service ratio is high enough, the company is structured properly, and it has a good business credit score. Don’t forget to get your personal credit in top shape as well. When you have these things in order, then getting a commercial property loan should be a breeze.
