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Commercial & Small Business Funding
Are you a consumer or a new business owner that’s new to commercial lending and small business financing? Do you have questions about borrowing money? Read on for a quick primer on the basics of commercial real estate funding.
Commercial real estate funding is a subject that raises many questions. Before you can secure financing and make sure that you are getting the best financing package for your financial needs there are a few basics you should understand in order to speak intelligently with potential lenders.
Before and during the application process make sure that you do your homework and never be afraid to ask your lender questions if you don’t understand any aspect of your financing transaction. Before we go any further, let’s cover some basic terminology you will be exposed to during your search for commercial real estate funding.
Debt Coverage Ratio
Debt coverage ratio is the ratio of cash flow to your monthly loan payment. Commercial lenders usually require your property generate a certain level of cash flow per month. The standard debt coverage ratio usually required by commercial lenders is 1.20, although in some circumstances it can be lower.
Loan to Value
Loan to value, or LTV, is a ratio that compares the value of a property to the amount of the loan. Residential and commercial lenders generally favor loans with an LTV no more than 0.80. Due to this industry standard you will usually need a down payment of 20% of the property’s purchase price in order to secure financing.
Loan Term
The term of a loan is simply the length of time before full payment of the loan is due. With residential mortgages, the term is usually either 15 or 30 years. However with commercial financing your term will usually be 10 years although other options are available.
Prepayment Penalties
Standard commercial real estate loans may include penalties for paying your loan off early. Generally lenders utilize a sliding scale to assess the amount of the penalty based on the remaining loan amount. As a rule of thumb, each passing year reduces the penalty percentage.
What Else Should I Know?
• Ask your lender about escrow arrangements on your commercial loan. Find out who is responsible for taxes and insurance under the terms and conditions of your commercial loan.
• Commercial loans may have different terms and conditions when it comes to responsibility of property upkeep than the residential financing you may be used to. Inquire as to the specifics of your small business or commercial financing to avoid surprises.
• Make sure the property you would like to finance is actually zoned for commercial use before approaching a lender to secure funds.
• Commercial lenders and commercial properties may have restrictions on improvements, appurtenances, and equipment. Find out about this before you sign anything because telling your lender you didn’t know the terms of your loan down the road will not excuse you from having to adhere to the terms and conditions of your commercial loan.
• Commercial lenders, especially those offering loans to small businesses may require a guarantor and they usually require this to be the owner of the business. You lender may also require you to offer collateral.
• For incorporated borrowers owner guarantees are usually required unless your loan is secured by bank deposits or marketable collateral. If personal assets are in joint names, a sole proprietorship, and/or partnership, your lender may require all parties to pledge collateral
BUSINESS LOAN APPLICATION CHECKLIST
• Business Loan Application
• Accountant-Prepared Business Financial Statements (Profit and Loss, Balance Sheet) for the past three fiscal years
• Business Federal Tax Returns for past three fiscal years
• Interim Financial Statements (if available)
• Most Recent Federal Tax Returns for each principal owner listed in the first section of the Business Loan Application
• Personal Financial Statement
• Organizational Papers (Articles, D.B.A. papers, etc.) |
