Disclaimer: Information in the commercial real estate articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the commercial real estate articles often covers financial products that Biz2Credit does not currently offer.

If you're a business owner trying to figure out how to finance a piece of commercial real estate, it's natural to feel stressed, especially if this is your first time. The key to getting rid of that stress and securing the financing you need is to understand the commercial loan process and what lenders are expecting from you. Then you'll have no trouble in preparing your application and (hopefully) securing your loan.

This guide walks you through basic lender requirements and outlines everything you need in a business plan and application so that you can have the best chances of being approved with minimal hangups.

3 Key Takeaways

Make sure you understand basic lender requirements before starting the loan process

Having a strong credit score can help you get better terms on your loans

Explore all of your financing options so you can select the best solution for your commercial property

In this article:

• Understanding Lender Requirements
• Preparing Your Loan Application
• Valuation of Commercial Property
• Enhancing Your Credit Profile
• Exploring Different Financing Options
• Leveraging Relationships with Lenders
• Negotiating Loan Terms
• Alternative Financing Options
• Conclusion
• FAQ Questions

Understanding Lender Requirements

Lenders get a lot of applications, but they don't offer financing to everyone. Lenders are looking for several things when looking for who they should work with, including a strong credit history, financial stability, and a property value that is favorable to the amount of financing you are seeking.

Your credit history may be the most important of these. A strong credit history lets lenders know that you can be counted on to pay back debt. While a low score doesn't automatically disqualify you, it may mean higher interest rates and less favorable terms.

Financial stability is also important. Lenders need to know that your business has enough cash flow and forecasted revenue to keep up with your loan payments.

The property's valuation also plays a critical role. Since the property itself is the guarantee of the loan, lenders will evaluate the property to ensure that it is worth the amount that you are borrowing.

Preparing Your Loan Application

If you submit an application that is hastily filled out, doesn't include all of the necessary documents, and is overall just a mess, you're hurting your chances of receiving timely funding. Many find it helpful to gather all required documents before they start filling out the application forms, so that they don't have to complete it in fits and spurts while rummaging around looking for necessary documents. At minimum, you'll need:

• Financial statements
• Tax returns
• A business plan

Together, these documents paint a picture of your company's financial health and your ability to repay the loan.

What should you be thinking about as you create your business plan? Put yourself in a lender's shows: They'll want to know how the loan will be used, how the property will help your business succeed, what your financial projections look like, and whether or not you are a savvy businessperson who is likely to repay the loan.

Think of your business plan as part financial projections and part storytelling about your brand.

When submitting your documents, be sure to double and even triple check everything. Any discrepancies or missing information can delay the process or even result in a denial.

Valuation of Commercial Property

Lenders need precise appraisals that let them know the value of the property you want to finance so that they can decide how much they're willing to lend.

An accurate appraisal can make or break your loan application, so it's important to work with a qualified appraiser who has experience in the type of property you're looking to finance. They will evaluate the building or property itself, as well as its location and prevailing market conditions. Check online reviews before you hire someone, as you may find repeat reviewers saying that the appraiser you are considering is fair (a good sign!) or undervalues properties (a bad sign).

If this is a property you already own, and you are seeking to refinance, you may want to take care of outstanding maintenance you have and even make small upgrades before calling the appraiser. A fresh coat of paint and a few easy fixes can increase the property's value and, consequently, the loan amount you can secure.

Enhancing Your Credit Profile

As already noted, a strong credit history is critical for securing commercial property loans.

If your credit score is low or average, work on improving it before applying for a loan. Start by paying off old debts and fixing mistakes on your credit report. You should also avoid making new inquiries about additional lines of credit (including credit cards), as these can temporarily ding your credit scores. It may take a few months of proactive work to bring up your credit score, but your efforts will pay off in spades if they lead to more favorable lending decisions being made.

Exploring Different Financing Options

There are several types of commercial real estate loans, each with its pros and cons. Understanding your options can help you choose the type of loan that best fits your needs.

Term Loans: Term loans provide a lump sum that's repaid over a fixed period with interest. They're ideal for significant, one-time investments such as property purchases or major renovations.

Bridge Loans: Bridge loans are helpful if you need to purchase a new property before your old property has sold. These loans "bridge" the gap between purchase and sale, but because they are short-term, they typically come with higher interest rates.

SBA Loans: It's a common misnomer that SBA loans come from the Small Business Association. In reality, these loans offer favorable terms and low interest rates because they are backed by the SBA. The loans themselves come from standard financial institutions but the terms are better because the risk is reduced for the lenders. Note that SBA loans come with more red tape, so the approval process can be longer and you may need to submit additional documentation.

Leveraging Relationships with Lenders

Building a strong relationship with your lender won't guarantee you a commercial real estate loan, but it can give you an edge. If your lender knows you and trusts you, it can lead to better loan terms, quicker approval times, and ongoing support from your lender.

Start by establishing a relationship with your bank or lender well before you need a loan. Regularly update them on your business's progress and financial health. This ongoing communication builds trust and demonstrates your commitment to financial transparency.

Additionally, consider working with a lender who has experience in your specific industry. They'll be better equipped to understand your needs and offer tailored advice.

Negotiating Loan Terms

Once you've been approved for a loan, it's time to negotiate the terms. Don't be afraid to ask for better interest rates, longer repayment periods, or more flexible conditions if you aren't happy with what they offer you at first.

While not everything is negotiable, interest rates and repayment terms typically are, especially if the property is valuable and you have a good credit history.

Approach negotiations with a clear understanding of your needs and be prepared to walk away if the terms don't make sense. Remember, the goal is to secure a loan that supports your business's growth without causing undue stress on your cash flow.

Alternative Financing Options

Traditional loans aren't for everyone. If you don't qualify, but still need the funding, you may be able to finance your commercial real estate through crowdfunding, private lenders, or Real Estate Investment Trusts (REITs).

Crowdfunding: Platforms like Fundrise or RealtyMogul allow you to raise funds from a large pool of investors. That being said, crowdfunding efforts have a low success rates, and often require significant marketing to make the offer attractive.

Private Lenders: Private lenders can be more flexible than traditional banks, but they may charge higher interest rates as they seek to protect themselves from risk. Still, if you need fast access to capital, and the terms are favorable, they might be the right option for you.

REITs: These entities pool funds from multiple investors to purchase real estate properties. Investing in a REIT can offer returns without the responsibilities of direct ownership, though it also means giving up control over the property.

Conclusion

Small business owners may find the idea of financing a large property overwhelming, but the truth is, people are doing it every day. If you can understand the lender requirements, get your loan application together, and keep your credit score up, you have a good chance of getting the financing you need. Rememberᅳthe effort you put in today is an investment in the growth of your business tomorrow.

FAQ Questions

What factors do lenders consider most when evaluating a commercial real estate loan application?

Lenders typically evaluate the borrower's credit score, financial stability, property valuation, and their experience in the industry.

How can I improve my chances of getting a commercial real estate loan approved?

Enhancing your credit profile, preparing a comprehensive loan application, and building strong relationships with lenders can improve your chances.

What are the most common mistakes made during the commercial loan application process?

Common mistakes include incomplete applications, poor credit history, and unrealistic financial projections.

Are there specific types of commercial properties that are easier to finance?

Properties with strong cash flow potential, such as office buildings, retail spaces, and multi-family units, are often easier to finance.

How do changes in the economy impact commercial real estate lending?

Economic changes can affect interest rates, lending criteria, and the availability of loans, impacting the overall commercial real estate market.

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