Commercial real estate loans are used to purchase income-producing properties such as an apartment complex or an office building. In general, the commercial real estate loan requirements are good credit, proof of profitability for 2 out of the last 3 years of business, a down payment (typically 10%), and a Debt Service Coverage Ratio (DSCR) of 1.25 or higher. DSCR is a measure of the cash flow available to pay current debt obligations. Your DSCR can be calculated by dividing your Net Operating Income by your Debt Services. You may use the commercial real estate itself as collateral for the loan, however, some lenders may also require you to assign your rents or leases as additional collateral.
Here are some Important considerations before you continue:
• Be sure to have proof of profitability for at least 2 years.
• Determine the loan-to-value ratio (LTV) — some lenders will not exceed 80%.
• Check your monthly payments with our Business Loan calculator.
Lenders may require bank statements, personal tax returns, business tax returns, business registration documents, and proof of profitability for 2 out of the last 3 years of business. They may also request a UCC-1 (Uniform Commercial Code-1) financial statement, which is a legal form a creditor files to give notice that it has an interest in the personal property of a debtor.
Your credit report may also come under scrutiny. Many people know this, but what lenders are looking for and what they are assessing is often a mystery. TransUnion, Experian and Equifax are three different consumer credit reporting agencies that lenders depend on to get the information they need to determine whether or not they will extend credit to you.
Your credit score provides lenders with a lot of information on your creditworthiness, but it doesn’t tell them the whole story. There are certain things that lenders look for on your credit report, beyond your credit score, that allows them to predict your creditworthiness — or how likely you will be to repay the money you borrow.
The main things lenders often look for beyond your credit score are:
• Outstanding debt
• Delinquent accounts that are more than 30 days past due
• Age of your accounts (how long you have had your credit cards or how long you have been paying on a loan)
• Ratio of account balance to available credit on revolving accounts
• Collections accounts that are unpaid
• Past bankruptcy
• Civil judgments or tax liens (as of July 2017, these will only be reported to the credit bureaus if identifying information like a Social Security number or birthdate is attached)
• Number of recent credit applications (hard pulls on your credit report)
While one or two little spots on your credit report may not prevent you from getting a loan, it can mean that you will have to pay a higher interest rate.
Your debt-to-income ratio is another important factor in how you appear to lenders. While a higher income may make you look good to lenders, and you can pay your bills each month, if your debt-to-income ratio is too high it can be a hindrance. If your fixed expenses like your mortgage or rent are too high, it can impact your ability to get a loan.
There are several things you can do to make yourself more attractive to lenders. The best time to start is before you even need a loan. That way, if there are problems, you have time to correct them so that you can ensure a strong lending profile.
The very first thing you should do is to get a copy of your credit report. Everyone is allowed one free copy each year. Getting your own credit report is considered a “soft pull," which means that it doesn't affect your credit score like a hard pull from a credit card company or loan company would.
For personal and business loans, you will often need to provide your tax returns. You’ll likely need both personal and business tax returns for the commercial investment loan process. The lender will also often require your bank statements. Again, you’ll need personal bank statements for a personal loan and business (possibly personal as well) bank loans for a business loan.
Lenders for a business loan may also want to see a balance sheet, profit and loss statements, and documentation showing how long you have been in business. Some other things they may request include:
• Your business plan
• A business debt schedule
• Documentation on your collateral