How to Apply for a Commercial Loan

Author: Woodsboro Bank

Categories: Blog

commercial loan budgetA commercial loan is a type of credit used by companies to support their business activities. It is generally earmarked for a specified purpose and typically comes with more complex credit structures than personal loans. Commercial loans are often secured, which means they are backed by physical collateral. One of the most common types of commercial loans is a commercial real estate loan, which businesses use to purchase or renovate commercial property. Here is a look at what is involved in the process of applying for a commercial loan.

Determine Whether You Meet The Requirements

Before filling out an application, businesses can save time by ensuring that they meet the requirements for the loan. Although each lending institution has its own specific requirements, lenders usually look at the business’s finances, the owner's personal finances, and the characteristics of the property that is being financed.

Business Finances

Businesses can expect their finances to face a lot of scrutiny when applying for a commercial real estate loan, particularly smaller businesses. Your bank will review the books to determine whether you have sufficient cash flow for repaying the loan. They will also calculate the company's debt service coverage ratio; they'll be looking for a ratio of 1.25 or higher in most cases. Lenders also consider a business's credit score when determining whether to extend approval and which terms to offer, such as their down payment requirement and interest rate. In addition, a small business will typically need to be structured as a business entity, such as an S corporation or a limited liability company, to be eligible; real estate loans that are extended to sole proprietorships are considered personal loans rather than commercial ones.

Personal Finances

In the case of a small business that is controlled by an owner or a group of partners, lenders will assess these individuals’ personal credit scores and histories. They will be looking for past financial problems such as foreclosures, court judgments, tax liens, and defaults. Individuals with a low personal credit score could compromise their company’s chances of getting a commercial loan approved.

The Characteristics Of The Property

Because the property that the loan is financing will serve as collateral, the lender will consider its characteristics carefully in making its approval decision. In addition, small businesses are typically required to occupy more than half of the building they wish to finance with a commercial loan.

Gathering Documentation

The commercial loan application process can be slow, and businesses should be prepared to supply extensive documentation. Gather information such as your company's last three months of bank statements, business tax returns, third-party appraisals of the property, your business plan, and the company’s books and records. Most lenders list their minimum business loan requirements on their website. This can give you a good idea of your ability to qualify before you even fill out the application.

Improving Your Chances Of Being Approved

If your business is relatively new or the owner's credit is less than stellar, there are a few ways you can improve your chances of gaining approval. Begin by paying off any existing debt that you can and taking other steps needed to improve your credit score. You might consider adding an investor or a cosigner with a better credit history or offer additional collateral if possible. Another way to increase your odds is by agreeing to pay a bigger down payment or a higher interest rate on the loan. If none of these actions are possible, you might consider choosing a less expensive property.

Closing The Loan

banking lender meetingOnce you have compiled the required documents and submitted an application, you will have to wait for a decision from your lender. The timeline for this varies depending on the source of the loan. If you receive approvals from multiple lenders, you will need to evaluate and compare the offers you receive and determine which one best meets your needs and budget. Once you have decided which loan you would like to proceed with, you will work together with your lender to close the loan. During this process, it is important to carefully review the business loan agreement and ask any questions that arise. Consider hiring a financial advisor or business attorney to look through the documents with you to ensure you understand everything you are agreeing to. When the documents have been signed and the closing process is complete, the funds will be sent to your bank account so you can move forward with your business's plans.

Reach Out To The Commercial Banking Specialists At Woodsboro Bank

The commercial loan process may seem overwhelming, but approaching it step by step and working with experts in the field who can guide you through the process can make all the difference. If you need assistance or advice on applying for a commercial loan, reach out to the commercial banking specialists at Woodsboro Bank to request an appointment today.