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Applying for a Real Estate Commercial Loan - What Banks and Lenders Consider

Buying commercial property to set up a new facility or expand an existing one is usually a big commitment. If you are a small business owner, your access to this type of loan, which in certain ways is similar to a home mortgage, is based on a number of factors that depend mainly on the loan provider.

In general, lenders look into three areas before approving a commercial real estate loan application:

Business Finances

Often, commercial real estate loans at need more examination than home mortgages, because small businesses are high-risk and a lot of them eventually fail. Banks and commercial lenders will have to check your books to see that your business is making the cash flow needed to settle the loan. A lender will probably determine your company's debt service coverage ratio - annual NOI (net operating income) divided by annual TDS (total debt service). This is the amount you have to spend to return your debt, principal and interest included. The usual required ratio is at least 1.25. For instance, if your business is debt-free and you apply for a $200,000 commercial real estate loan, you have to prove that you can come up with an annual NOI no lower than $250,000.

Additionally, the lender will take a look at your business' credit score to know what terms - interest rate, down payment requirement, payment terms, etc. - are suitable. The minimum FICO SBSS credit score requirement is around 140, the minimum for SBA pre-screening, though there are lots of exceptions either way. Your small business has to be structured as a limited liability entity . If you are a sole proprietorship, a real estate loan would be treated as personal instead of commercial, which means your personal assets will be at risk should you default. Get more facts about loans at

Personal Finances

Small companies are typically owned and controlled by an individual or a group of partners. All kinds of lenders will need to review your personal credit score and history to know if there are defaults, tax liens, foreclosures and other similar financial problems to your name. A low personal credit score could compromise your company's chances of getting a loan.

The Property

The property to be funded by the Assets America loan serves as collateral, and the lender puts a lien to the property allowing its seizure in case you default. To be eligible for a commercial real estate loan, your small business needs to occupy no less than 51% of the building, or you should be aiming for an investment property loan instead. Hard-money lenders usually base loans solely on the value of the property with little weight given to the potential borrower's creditworthiness. The property may be a a storefront, a lab, a warehouse, a building or any other property intended for business. Single family residences are not qualified, but a multi-family property might be if that is where the business will operate out of and the occupied area meets the 51% requirement.

Finally, a lender will usually let you borrow as much as a maximum loan-to-value (LTV) ratio, which is about 65% to 75%. That means your business should pay the remaining amount down. For instance, for a property appraised at $100,000 and a lender requiring a 60% LTV, you'll have to deposit $40,000 to get a $60,000 loan.

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