If you’re looking for financing to buy a commercial property, there are a few things to consider before applying. Unlike residential mortgages, CRE loans require thorough analysis of both your business and the property itself. They also usually have higher 후순위담보대출 interest rates than traditional mortgages.
Unlike home loans, commercial mortgages are generally owner-occupied and require significant down payments. However, there are some alternatives to these options.
Collateral
Commercial real estate loans use the real property occupied by a business as collateral. This is unlike mortgage loans, which are secured by the borrower’s personal property. Typically, the debtor is a corporate entity or developer, though individuals can also borrow a CRE loan. Other assets that are often used to collateralize a commercial finance loan include fixtures, equipment, bank and trade accounts receivables, inventory, general intangibles, and supplies.
If a borrower pledges multiple assets as collateral, they are said to be cross-collateralizing. This practice can open the door to lower interest rates and better loan terms. However, it is important for borrowers to understand the risks and value of their assets before pledging them as collateral.
The process for obtaining a commercial real estate loan is similar to that of consumer home loans, but the lender will request more information from the applicant. They will likely want to see three or more years of income tax returns, credit reports, and financial statements, and they may ask for a commercial real estate valuation.
Debt-to-income ratio
Unlike residential mortgages, commercial loans are typically secured by business assets instead of personal income. The debt service coverage ratio (DSCR) is a key factor used by lenders to determine if the borrower has enough income to cover new debts and expenses. This ratio compares a property’s annual net operating income to its annual mortgage debt service.
Lenders typically require a DSCR of 1.25 or higher to ensure sufficient cash flow. However, this figure may exclude some monthly financial obligations, such as utility payments and interest payments on bridge loans. Other factors include a property’s rental revenue, occupancy rates and lease maturity profile.
The types of lenders that provide commercial real estate loans vary from bank to private lender. Banks are conventional or traditional lenders that offer the most flexible terms and lowest interest rates. They also have strict eligibility requirements and usually finance low-risk projects. Private lenders, on the other hand, have looser eligibility requirements and charge more for their services.
Business entity
Choosing the right business entity is an important first step for a small business owner. This decision affects tax forms, liability and what will happen if the business is sued. The type of entity you choose will also determine whether your personal assets are at risk.
In some cases, a commercial real estate loan lender may require that one or more principals or owners of the entity sign a personal guarantee to support the transaction. This gives the lender an individual with a credit history from whom it can recover in the event of a default.
Depending on the type of commercial loan you’re applying for, the lender may also require that you form a special purpose entity (SPE). These are legal entities designed to meet narrow, specific objectives. Consult with a lawyer or financial professional to find the best structure for your needs. NerdWallet’s guide to business entities can help you understand how they work and what the different options are.
Credit score
Commercial real estate loans are used to finance business investments such as office buildings, storefronts and facilities like warehouses. They generally require higher credit scores and a lower debt-to-income ratio. If you’re looking for a commercial loan, it’s important to research different lenders and compare their terms. For example, some lenders have down payment requirements while others may have a maximum loan-to-value ratio. You can also get a commercial real estate loan from lenders that offer loans backed by the Small Business Administration (SBA).
When applying for a Commercial real estate loan, you will need to provide past and current financial documents such as your personal and business credit report, balance sheet, income tax returns and debt-service coverage ratio. In addition, the lender will want to know your projected NOI from the property and details of any renovations you plan to make. It’s also a good idea to settle any outstanding judgments or collections. Your credit score will be a key factor in your loan approval, so it’s important to keep it as high as possible.