5 Tips for Securing a Commercial Real Estate Loan

Have an innovative business idea that you’re looking to get off the ground? Now could be the perfect time to act. Or maybe you already have a business up and running but you’re looking to expand. You may even want to dabble in an investment property.

Whatever your reasons for wanting to secure a commercial real estate loan, there’s no time like the present. But first, you have to take certain steps to ensure you find the right loan with the right lender. To help you do that, Rivermark Community Credit Union has come up with five tips for securing a commercial real estate loan.

1. Have a Solid Business Plan in Place

Commercial real estate refers to income-producing property. The income can be produced in a number of ways. Generating rental income from business tenants and earning capital gains from the sale of an investment property are just a couple of ways to make money through the purchase of commercial real estate.

If you wish to secure a commercial real estate loan, you’ll first need to form a business. Unlike residential loans issued to individual borrowers, commercial real estate loans are extended to business entities, such as developers, corporations, and partnerships. For more info on selecting a legal structure for your business, look here.

Once your business is formed, you can move ahead and apply for a commercial real estate loan. But you’ll want to have your business documents in order. This may include a copy of your state business certification, as well as a business plan describing your company and outlining how the property will be used. You will also need to furnish financial statements, which leads us to our second tip.

2. Demonstrate Your Creditworthiness

As with any loan, you need to demonstrate that you’re financially responsible before a lender will extend credit to you. In order to establish your creditworthiness, there are certain documents you will need to provide. For example, be prepared to furnish tax returns, bank statements, and other financial records that show the net worth of your business.

Lenders may also check your business credit score and personal credit history. If your business is new, then a lender will pull your personal credit score to decide whether to extend a loan offer. Your credit score will also impact certain aspects of the loan, such as your interest rate, loan amount, and repayment terms.

Before applying for a commercial real estate loan, take steps to strengthen your credit score. It will save you money in the long run and may even help boost the amount of your loan. Check out sites like Credit Karma and Nav, which offer tips on how to establish and strengthen your credit score.

3. Find the Right Property

You’ll need to locate a property before attempting to secure a commercial real estate loan. It’s important to find a property that works with your budget and also fulfills your needs. That’s why you should do your research and ask the right questions when viewing properties.

For instance, ask what the property has been used for in the past. If the property has been used for a different purpose previously, find out whether any changes in zoning will be required in order to develop the property for commercial use. You’ll also want to inquire about property taxes and find out how much income or rent the property earns on an annual basis. If the owner is forthcoming, try to find out why they’re selling the property as well.

Also, ask if the property is in need of any repair work. If you need to make extensive changes, be sure to factor the cost into your finance amount. Keep in mind that with commercial real estate loans, many lenders require a downpayment of 20% to 30% of the purchase price. So before you get started, calculate how much you’re able to pay toward the purchase price, and limit your search to properties you can afford.

4. Explore Lender Options

Just as you search for the right property for your business needs, you should also search for the right lender for your financial needs. Speak with multiple lenders to determine which one will offer you the maximum loan amount, best interest rate, and most favorable loan terms.

The US Small Business Administration offers some commercial real estate loans and can direct you to one of their preferred lenders. Some lenders, such as community credit unions, are also good options because many offer development tools and resources to help you grow your business. So do your due diligence and compare lenders before settling on one.

5. Understand the Loan Terms

Once you find the right lender, you’re one step closer to securing your commercial real estate loan. But before you close on your loan, be sure you fully understand the loan terms. It can be useful to have a commercial real estate attorney go over your loan documents with you to make sure you fully understand what you are signing.

For instance, some commercial loans offer repayment plans with a balloon payment option. That means you typically pay smaller monthly payments for a set period of time and then you pay the remaining balance in one final balloon payment.

That type of loan can work for some who are expecting an influx of cash down the line. However, it’s also a risky type of loan if you’re unable to make the final payment. Another reason why you want to make sure you understand all the loan terms.

Also, check whether your lender requires some type of personal guarantee if you fail to repay the full loan amount. On the other end of the spectrum, you should also inquire whether there’s a prepayment penalty if you want to pay the loan off early.

Commercial real estate loans can be exciting. They can also be tricky. The more you do to set yourself up for success now, the better off you’ll be in the future.