Commercial lenders are committed to completing their due diligence before approving a loan. Knowing the 3 most important factors that they are looking for will help you to be successful when applying for a loan.

There are several reasons that commercial lenders are very diligent when reviewing commercial real estate loan applications. Not only is the sum of money that is being requested much larger than that of most residential mortgages but there are also a few other reasons. Lenders view commercial loans as a higher risk due to the volatility of the commercial real estate market. Property values can and do fluctuate more frequently and rapidly than residential property values. In addition, a business’s income or cash flow is much more likely to fluctuate than a consumers income does when there is a change in the economy. This factor increases the odds of a business defaulting on a mortgage or loan. Knowing this, commercial lenders tend to look very closely at three major factors when accessing a business’ creditworthiness.

In almost every case the property being purchased is the collateral for the loan. So commercial lenders are very concerned with the current value of the property as well as its lease history and historical value. No lender is betting that you will default on your loan but in the event that you do, then commercial lenders need to be able to foreclose on the property which is the collateral and liquidate it for at least the remaining balance of your loan. With this in mind, they prefer to lend money for a property that they are certain will holds its value for the life of the loan term.

Cash flow is also a critical point for lenders. It is the desire of every lender to see that the borrower has a steady income of 20% more than the debt load that is being carried. That is why the borrower must submit documents proving their income, expenses and historical data for the operation of the business. This information shows the lender that the company is solvent and has remained in a steady financial position for at least six months.

Be Prepared to Be the Guarantor

Even with all of the numbers in line on your business financials you should expect that the lender will want you, the owner, to personally guarantee the loan. With that in mind, the lender wants to be certain that you have the means to repay the loan if the company defaults. You will need to submit your personal financial documents to support your claim of being able to guarantee the loan.

Can You Meet These Requirements?

In most cases applying for a commercial loan is not a free process. The lender is going to charge certain fees that are nonrefundable even if you are denied the loan. And you will also be investing your time, the time of your accountant and lawyer as well as the time of some key employees to prepare the application. So you will want to carefully consider the financial health of your business and your personal financial position to be sure that you can qualify. There is no point in applying and spending the money if you know that you will not meet the three basic loan criteria.

Dennis Dahlberg
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177 NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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