Purchasing property is a big commitment for a small business, and often, the financing is done with a commercial real estate loan through a bank or commercial lender. The team at Appro & Cerron has some useful information to help business owners through this process of getting quick financing on your commercial property. Obtaining a commercial loan is similar to obtaining a home mortgage. Depending on the lending source, there are many requirements and early steps your business must prepare before acquiring the financing from a lending source. There are also many options for obtaining a loan, for which we will explain the pros and cons for each to help determine what will be the best fit for your business's finances.
How to prepare
Lenders tend to look over three things when determining to grant your business a loan. First, they are going to look at your business's finances to make sure you that your business has the cash flow necessary to repay the loan. Second, lenders will also tend to look at the personal finances of the owner, mainly just checking credit history to see if there have been any problems in the past. Third and finally, the lender will also review the value of the property and attach a lien to the property as collateral, if you fail to repay the loan on time.
As you prepare to meet with a lender, in general, the following is list of things lenders will require of you and which you should prepare for your meeting:
- Up to five years of tax returns
- Books, records, and financial reports for up to the last five years
- Projected cash flows for life of the loan
- Credit score checks and personal finances of owners and managers in the company
- A third-party appraisal for the loan
- Business plan showing how the property will be used, and sometimes an explanation of the business's management expertise and commitment
It can be a challenge for borrowers with poor credit to receive commercial loans; and while not impossible, they may be required to pay a higher interest rate.
Where to find a commercial real estate loan
There are two common sources that many businesses choose to get their loan from. If you, the borrower, plan to purchase investment property, considering a loan from a bank would be a good option for you.
- Regional and national banks offer big loans, compared to where a local bank would go up to $1 million for a loan
- Banks will offer you the best rates compared to to other sources (e.g. 3%-14%), and there is the possibility of synergies with other accounts
- The downside of banks is that they require the most documentation which makes the process slow.
If you are a small to medium-sized business, a commercial lender might be a better fit for you.
- Commercial lenders have a faster approval than banks because of the less rigid underwriting standards they have.
- The big downside is that their interest rates are higher than banks and they may require a balloon payment in 5 to 10 years.
Small businesses with bad credit tend to face limited options when finding commercial real estate financing, so one consideration is hard money lenders. They care more about the value of the property financed, and less about the borrower's credit score. Most hard money lenders can close a loan quickly compared to bank or commercial lender, which is good for purchasing property quickly. The drawback is that the interest rates and down payments will be higher because the hard money lenders evaluate the value of the property more so than the borrower. If you are a borrower with good credit, an SBA 504 loan would a great option to investigate. This loan program is also open to new and existing businesses, but it will require a higher down payment than other more widely utilized options.
Some SBA 504 loan features include:
- The loan is divided between a bank and SBA approved certified development company. They would both work together in issuing your loan.
- Bank loan: 50%, CDC loan: 40%
- A low down payment of 10%, and offering 10-25 year terms with low interest rates.
It is important to shop around so your company can get the best loan offer possible. Receiving multiple offers and reviewing the fine print would be advised, and possibly bringing in a third party to look over the financial part of the contracts being offered. The amount of time to acquire the financing will vary with what source best fits your company.
We hope that this content will give a better understanding on where to get quick financing for commercial real estate. Appro Development & Cerron Properties would like to remind all our customers how grateful we are for your business and support.
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Disclaimer: Appro Development, Inc. and Cerron Commercial Properties, LLC have compiled the above information from multiple sources and make no warranty or representation regarding the information shared above. You and your tax, and/or legal adviser(s) should conduct your own investigation and research regarding the best financial options for you and your unique business.