Hooman Nissani: The Steps to Getting a Commercial Loan – What You Need to Know

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No matter your reasoning for becoming a commercial property developer, the time will come when you need to obtain financing for an investment. If you cannot raise the capital yourself or gain the financial support of investors, then you will need to apply for a commercial loan.

Here are the steps you need to follow, as well as anything else you ought to be aware of.

Generally, there are a trio of requirements a lender will ask for in order for them to consider granting you a commercial loan. These are the financial state of your business, the financial state of your own circumstances and the characteristics of the property the loan will be for.

·         Banks and commercial lenders usually consider loans to businesses as being risky. They will want to see a clear indication of your ability to pay back the loan. They will add the loan repayments to your average expenditure and compare it against your average income, and they will expect the latter to exceed the former by a ratio of 1.25 at least. This will convince them that you have the ability to repay the loan over time.

·         Commercial lenders will also want to see you and your partners past history in terms of credit repayments. Any defaults, court judgments or credit problems in the past will definitely count against you.

·         The lender will of course wish to see the property themselves and what you have planned for it. They may also seek independent views on how much the property is worth, and its potential to generate income.

You must understand your own limitations when applying for a commercial loan. A commercial lender will not lend you the full amount of the value of the building – usually only around 65-75 percent. The rest of the money you will need to source from elsewhere.

The application process for a commercial loan can be long-winded and laborious, but if you are fortunate you may be given access to your loan within days. You will need to supply several items of documentation in order to kick-start your application. Expect to be asked for tax returns, company accounts, projected cash flows, credit reports for all interested parties and a business plan detail the property’s future use.

Where Can You Obtain a Commercial Loan?

When you need to obtain a commercial loan, the first place most people think of is a bank. The majority of banks will consider applications for commercial loans. Even local banks are able to offer commercial loans typically up to $1 million, if not more. If you need more money, then you will need to go regional or national. A bank often offers good rates but has the slowest and most laborious application process.

Commercial lenders are not tied-in to banks – they are companies with the sole purpose being to lend money and then make their income from interest payments. If you feel the application process with a bank is likely to be too long, complicated and fruitless, then you can apply for a loan from a commercial lender instead. Note though that the interest rate will likely be higher.

You may also consider an SBA (Small Business Administration) 504 loan or 7(a) loan. There are several criteria that your investment must meet for you to be able to apply for either of these options though.

Your final options are hard-money lenders, conduit lenders and P2P marketplaces. Make sure you thoroughly examine all your options before you come to your decision.

The author of this blog is commercial real estate expert and successful entrepreneur Hooman Nissani of Nissani Brothers Enterprises. Mr Nissani can be contacted here if you’re interested in learning more about commercial real estate of any kind.