There are numerous things to consider when getting commercial real estate loans approved for a small-sized business. The complicated aspects range such as debt ratios, valuations and. But, the majority of these things are handled when you focus on and control just three important factors in making sure your company has an office space it requires to expand and flourish.
If we do not take into consideration certain obvious issues with commercial lending such as your credit score, the property’s use, as well as if your property is going to be used for your business (owner-occupied) or as a company (rental property) The following three factors are the most important when obtaining your loan approval:
3 Keys To A Commercial Property Loan
1.) Price is important.
It is a big factor. It is a matter of what you are able to manage to afford, the items you can purchase, the place you are able to purchase and the amount of loan you can obtain.
The majority of borrowers who are looking to purchase properties for their small businesses tend to begin looking at what they require before attempting to locate properties that meet their needs. It’s fine if resources are endless. However, many small companies don’t have unlimited riches and usually have more requirements from their property than the funds to meet these needs. This means that they are unable to afford property that can meet all of their business’s requirements. So, they’ll need to settle eventually.
On the other hand We suggest that before you start thinking about your needs specifically and what you need to decide on, you need to first think about the price. The price you pay is not determined by the amount you think you’re able to pay however, what the lender thinks you are able to pay and what they’ll lend against.
Furthermore, you can determine the amount of loans you are eligible for, and then the amount of property you could buy by simply analyzing your earnings in the past.
All lenders will look at the amount of your loan and evaluate it against prior revenue figures. If your company could have paid for loan payments in the past three or four, five, plus years (in in the past) and it was plausible (in their eye) that your company can be able to continue doing so in the future.
So, let’s assume that your company earned past months a revenue of $5,000 (money that your business leftover to cover loans) over the past three years.
Then, can the monthly payment of $5,000 be enough to cover a $1 million loan? Actually the loan of $1 million at 6% over 15 years on a commercial property will result in the monthly cost of $8,500.
A monthly payment of $5,000 your small business could get a commercial loan worth approximately $600,000.
Then, with that amount in mind – and knowing the budget you have set – you can begin looking for properties that fulfill your business’s needs. You can then move up upon your budget. This is better than searching for properties that may not meet your requirements only to reduce that level to reach your budget.
To determine what your company can afford , its cost review your previous cash flow to figure out the amount your monthly payments could be . You can then utilize a calculator for online payments to calculate the maximum price for purchases using applicable rates and conditions or apply what-if scenarios to arrive at the price you want to pay.
2.) Down Payment
Once you’ve got the purchase price it is important to be aware of the main expenses commercial loans will cost you. You will not only need to pay closing costs, which include appraisals tax reports, appraisals, and insurance, you’ll be required to put at minimum (at at the minimum) 20 percent of the cost of the property as an equity deposit.
The best part is that you can utilize the 20% you must put down to boost the purchase price since the lender will only be able to fund the 80% of the property’s value. So, if you are able to take out a loan of $600,000. the lender will finance this amount – even though the amount you receive is just 20% of the worth of the property , then you could increase the price with the additional 20% that you need to pay. Therefore, even if you could manage a loan of $600,000. the total cost of your purchase could rise to $750,000.
The downside is that you will not only need to cover anywhere between 1% and 5percent of the loan’s amount for closing expenses – in our case between $6,000 and $30,000 – you’ll also need to make an initial amount that is $150,000 (in our case) This amount cannot be financed, neither through this offer nor through or from any other sources.
If you were to keep the purchase price at $600,000, you will need to put aside $120,000 as down payment. This would leave the amount of your loan at $480,000.
Small businesses are often left out in the purchase of real estate for their businesses (especially in high-value markets such as the ones we are currently experiencing) due to the fact that they don’t have or cannot access the necessary funds down. However 20 percent down is the standard nowadays and only a handful of lenders (if there are any) are willing to make an exception to this.
3.) Terms of Loans
What loan period you receive – or you fight for can be the key to being approved for your loan and how much interest that your loan will be charged.
The longer the loan period and the lower the cost of repayments as the principal of the loan is spread over a longer time. A more affordable (smaller) installment means that you stand a greater chance of having your loan application accepted.
Example: A $600,000 loan at 6percent would result in the loan paying around $5,500 per month. If you extend the term to twenty years and then the amount decreases to about four,300 per monthly. This means that your company could or have a less monthly installment or be able to raise the cost of the property that it is planning to buy. This is why the lending power is in the time.
On the contrary, there is always an expense. In this instance, it’s an interest cost. As long as the loan’s duration is, the higher interest you will be paying on the overall loan.
Example: A $600,000 loan at 6.6% over a shorter period of 15 years will result in a $311,000 annual interest over the duration of the loan. The same loan, if it was to be renewed for 20 years (5 more years of payment) and its total interest would increase to $432,000, which is a difference of just $121,000 in interest. It’s quite a difference!
Therefore, you must decide on your time frame – or take on the time period you’re seeking – and then strike a balance between what you’re able to afford and amount of interest a loan will cost your business , because regardless of the amount your business has to pay in interest, it will still have to compensate the cost in profit or costs savings. If it fails to make up for the cost it will suffer financial loss which isn’t what you’re in business to achieve.
This is a fantastic time for small companies to invest in commercial properties. Not only are rates low , one of the lowest we have ever seen however, the value of commercial properties haven’t yet started to climb back to pre-recession values. There is, regardless of how many foreigners are buying today there’s plenty of land and structures readily available, even in your backyard.
The only issue that is real with this market is getting an investment loan for the purchase. It’s much more difficult than it was 5 years ago. If you keep these three essentials to commercial properties in mind, you will be able to benefit from this favorable market and acquire the building your business requires to grow and thrive. If you have these essential issues taken care of before you step into your lender’s office, the other concerns will become easier – because these are the things that really matters to commercial lenders.