One of the most important things you must know before applying for a commercial real estate loan is that the property you intend to use (or are already using) has to be 51% yours. This means that more than half of the building must be employed for the purposes of commercial real estate. Only once this requirement is satiated should you even begin searching for a lender.
CRE Loan Pre-Requisites
The chief attributes that lenders will consider in regards to the viability of providing you with a CRE loan are:
Creditworthiness: Not surprisingly, your FICO credit score will play a big part in whether or not you can secure a CRE loan from a reputable lender. After all, this score tells lenders how reliable you are with payments; a low score increases their risk so the interest rate has to be higher to mitigate said risk. If you’re going for a federal loan, then the SBA requires a score of 155 (at least) to potentially render you a loan under SBA 7(a).
Financial Health of Business: Basically, be ready to open up your books to the lender for thorough financial scrutiny. Most small businesses fail, so they are an inherently risky endeavor. Lenders are especially interested in your debt service coverage ratio, with 1.25 being the standard lowest acceptable number. What this means is that you must be able to generate a net operating income of 1.25 times whatever the requested loan amount is.
Property Value and Health: Another attribute that will come under heavy scrutiny is the status of your real estate. In addition to owning 51% of it in order to qualify for a CRE loan, the property must be in a good enough state to make placing a lien on it (in case you default on the loan) profitable for the lender.
There are other important attributes necessary – but these for a good base for determining whether or not you should pursue a CRE loan, or perhaps instead go after an investment property loan. To explore accessible financing options for commercial real estate, contact the team at Capital Finance Partners.