5 Steps on Qualifying for a Commercial Real Estate Loan
If you’re ready to purchase property for your business, there are some genuine differences between residential and commercial real estate loans. The process is lengthier and delves into more facets of your life and finances. Knowing what banks and lenders look at is one way to have your finances in order.
- Net Worth
The biggest thing a lender considers when deciding on a commercial real estate loan is your total net worth. This number is calculated by finding the difference between your assets and your debts or liabilities. The higher the number, the higher your net worth. Many times a lender will want you to have a net worth equal to the amount you are trying to borrow. If your income is high, this will be taken into account if your net worth isn’t exactly equal.
Business and personal credit scores are standard pieces of information lenders look at when determining if you qualify for any financing. When looking at commercial loans, your individual credit score will come into play, but it will not hold as much weight as it does in other situations. Having an average credit score will typically be fine with lenders in this process.
Experience translates into success, at least where a lender is concerned. If you are seeking to secure a sizeable loan to purchase real estate, then the length of time you have been in your position will be determined. Not just that, but lenders want to see that you have the capability to manage or own that business with some efficiency. Therefore, be prepared to show lenders specifics about your business. They may want accounts receivables, profit and loss statements and growth projections.
The higher your income, the more likely a lender will look upon your loan application favorably. Lenders are also looking at the consistency of your income. Has it consistently been increasing or is it subject to wild swings? A salary that has been reasonable or one that has grown steadily is appealing to lenders.
If you go in search of a large loan, lenders are going to want to know you can pay it back. Liquid assets are an essential piece of the loan approval process. Banks don’t want a down payment to wipe you out. Therefore, they like to see that you have about 20 percent in assets backing you.
Securing a commercial real estate loan may be tedious, but being prepared for expectations is crucial. If expanding your business is your ultimate goal, then doing what you can now to prepare for the process will pay off down the road.