How To Qualify For A Commercial Loan

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When a business needs to purchase a commercial property, a commercial loan is one of the best options for financing it. The way these mortgages work is very similar to residential mortgages, which means that they are generally easy to understand. However, it is important to note that lenders tend to have stricter eligibility criteria because the economy and other factors can impact a business’s profits and income, and, by extension, their ability to pay back the loan. This means that the lender is taking on a bigger risk by extending the loan. Here is a look at what commercial borrowers generally need to qualify for a commercial loan. Keep in mind, however, that the specifics depend on the type of loan, the property, and the lending institution.


commercial real estate loans meetingA commercial borrower is required to use the commercial property they are purchasing as collateral for the commercial loan. This is not unlike the way a homeowner will use the house they are purchasing as collateral for their residential mortgage. This means that the lender can seize the property should the borrower fall behind on their mortgage payments. Therefore, the property needs to have sufficient value to enable the lender to recover their losses should the need to foreclose arise.

The Property’s Cash Flow

Commercial loan underwriters will consider the business's cash flow and compare it to the debt that they carry when deciding whether to extend a loan. A lender typically likes to see a steady net income that is 20 percent or more higher than the debt the business is carrying. Commercial borrowers are required to supply detailed statements of their income, budget, and expenses with their loan application. The lender will also consider how long the company has been in business and how experienced its owner is when it comes to running the company. Some lenders may also ask a business to provide evidence of assets or savings that can be converted into cash to prove that the borrower has the ability to cover the mortgage for a set period of time in the event that they experience a significant business loss.

Rental Income

If the property being financed is a commercial rental, the rents that the borrower receives will be considered when the lender is calculating the property’s cash flow. In some cases, the borrower may be required to assign their interest in the leases and rents from the building to the lender, but the lender will only be allowed to take them if the commercial borrower defaults on their mortgage.

The Guarantor’s Income and Assets

A commercial lending institution will also look at the financial situation of the guarantor, which is the individual who is guaranteeing that the loan will be paid if the business defaults on it. In most cases, this will be the business's owner. The guarantor’s credit, assets, and income may be considered as part of the mortgage approval process. In cases where a lender requires a guarantor, this individual must provide documentation of their income and assets, as well as their credit score and credit history to ensure that they meet the requirements the lender has set.

Owner-Occupied Requirement

To obtain a commercial real estate loan, lenders normally specify that the property must be owner-occupied. To meet this definition, the business typically has to occupy at least 51 percent of the space in the building.

Preparing for a Commercial Loan Application

The commercial mortgage application process requires a significant amount of paperwork, and it can be lengthy in many cases. Banks and lenders will ask a business for its tax returns, books, financial reports, records, and business plan. They will also request a series of recent bank statements, a third-party appraisal of the property in question, and details pertaining to collateral. Business owners who have poor credit or newer businesses without much established credit can expect to encounter more obstacles when they apply for a commercial real estate loan. You can help improve your chances of approval by paying off any existing debts, agreeing to make a larger down payment or pay a higher interest rate, or pledging additional collateral if it is available. If none of these options are feasible, you may want to consider choosing a less expensive property to purchase or adding a cosigner or investor with a better credit record onto the loan.

Reach Out to the Maryland Commercial Real Estate Loan Professionals

Whether your business has a long history in the community or is just getting off the ground, a real estate loan can help you obtain the right property to meet your objectives. Contact the commercial real estate loan professionals at Woodsboro Bank today to find more about our financing options with flexible terms that are designed to meet the immediate and long-term needs of area businesses.