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Commercial lending
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According to experts getting money for your commercial lending project can be quite a challenge if you do not know how to analyze and present the property properly to a commercial real estate lender. Theoretically speaking before presenting your property to a potential lender it is important to determine the most probable ratios that the lender is going to use in making a decision to lend you the money.
It is worth mentioning in this regard that there is an increased risk with commercial real estate loans because of the size of the loans. As a matter of fact hundreds of thousands to millions of dollars are loaned on commercial properties and projects. There is no hiding the fact that a commercial lending wants to make sure that he or she will get their money back from the generated income of the property.
More often than not most lenders will use the following three ratios to determine if they will loan the money on a project.
In an ideal scenario the first ratio is the debt coverage ratio or DCR. It is worthwhile remembering that the DCR applies to the property itself and how much income it is producing compared to the debt service, or how much money is paid out towards the mortgage on a monthly basis. As a matter of fact it is expressed by the net operating income divided by the total debt service.
On the other side of the coin the net operating income is the total income left over from the property after paying all the operating expenses. Point to be noted in this regard is that the debt service is determined by the mortgage terms, such as interest rate, length of the loan, and how often a payment is made. The general thumb rule in this regard is that the higher the DCR, the more ability the property will have to cover the debt service. Fact remained that many lenders require a DCR above 1.2 in order to consider it a relatively safe investment. On the other side of the coin anything below that indicates that the property is either barely breaking even, or losing money. Theoretically speaking a lender does not want to loan money on a project that is not able to cover its debt service.
If experts are to be believed the second ratio is the loan-to-value ratio. In simple terms this is expressed by the total loan balances (sum of all mortgages) divided by the market value. It is worth mentioning in this regard that when you apply for a commercial loan, as you do for a residential loan, you must determine how much value of the property you are actually borrowing versus what will remain as equity. In case if you can acquire a loan-to-value ratio of 75%, then that is generally a good number.
On the other hand if you can get more than 75% of the value loaned to you, then consider that a bonus. There is no denying that lender's rules and guidelines may differ greatly depending on how much they are willing to risk on the project.
According to experts the third ratio is the debt ratio. It is worthwhile pointing that for smaller commercial projects commercial lenders may require that you submit personal information to back the loan. More often than not this includes your personal income and debt on a monthly basis. In an ideal scenario the debt ratio is expressed by dividing monthly housing expenses by gross monthly income.
Theoretically speaking the results show how much debt stands in relation to income. Always remember that many commercial lending will not accept a debt ratio greater than 25%. However, point to be noted in this regard is that some commercial lenders have been known to go up to 28% or even 36%. There is no denying that a debt ratio greater than 25% stands a good chance of having budget problems.
The general thumb rule in this regard is that the lower debt ratio you have, the more likely you will be able to get funding for your smaller commercial project.
If experts are to be believed before approaching any lender, it is really important to analyze these ratios on your own. As a matter of fact they pertain to your specific deal for which you want to get financing. In an ideal scenario by performing the ratio analysis on your own, you can better determine if financing will be easy or difficult to obtain, depending on the nature of the project and its level of risk.
In addition it may be a good idea to contact several potential lenders and ask them their basic criteria and guidelines that they follow in evaluating properties. There is no denying that you may find that some lenders are far more conservative than others.
It is worth pointing that by understanding your property, you can better fit a lender to your specific needs. Also it is worthwhile remembering that private lenders can be extremely helpful with those risky deals that public lenders will not even consider. But before that be sure that you are well equipped with the proper information and supporting documentation no matter what lender you approach.
Believe it or not there are literally hundreds of commercial lending waiting to provide new businesses with growth capital. There is no denying that youve probably seen their advertisements pop up on your browser offering the lowest rates and best service. With so many lenders to choose from, the question now arises: How can you get past the gimmicks to find the one that will fill your needs
It is pivotal that you start with the type of business you want to open. Are you interested in a manufacturing, retail, agricultural, or service business Fact of the matter is there are many different types of business, all with their own unique facility requirements. However, it is worth noting that not every commercial lender will finance every property type. Other Articles |
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