The key to successfully obtaining commercial funding is knowledge. In this article, we conduct an overview of this area of financing.
What is a commercial loan? It 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 commercial loans 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 financing. The personal credit of you, the borrower, matters, but not nearly as much as the fundamentals of the property finances.
The first thing to understand about seeking out commercial loans 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 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 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 1.1 to 1.4 cash flow ratio.
Collateral
Collateral is a much bigger issue in commercial lending then private lending. This can actually help you. You can often use other business assets to collateralize a 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 loan.
Management
Does the management of the business have any previous experience with this type of transaction, business niche and loan? How did it go? Remember, we are talking about risk assessments. A bank is going to be much more comfortable lending to a business with experienced management versus a group doing it for the first time.
What is the best method for successfully applying for commercial loans? Get experienced help. It can make the difference between getting the financing you need and watching a project go down the drain.
What is a commercial loan? It 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 commercial loans 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 financing. The personal credit of you, the borrower, matters, but not nearly as much as the fundamentals of the property finances.
The first thing to understand about seeking out commercial loans 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 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 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 1.1 to 1.4 cash flow ratio.
Collateral
Collateral is a much bigger issue in commercial lending then private lending. This can actually help you. You can often use other business assets to collateralize a 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 loan.
Management
Does the management of the business have any previous experience with this type of transaction, business niche and loan? How did it go? Remember, we are talking about risk assessments. A bank is going to be much more comfortable lending to a business with experienced management versus a group doing it for the first time.
What is the best method for successfully applying for commercial loans? Get experienced help. It can make the difference between getting the financing you need and watching a project go down the drain.
SHARE
