Small Business

What to Know Before Getting a Commercial Property Loan

Do you need a loan to start or grow your business? Here are several factors to consider.

Commercial property loans are necessary for many business owners. This is especially true for those who want to either set up their facility or expand their current one. However, it can be a complicated process that often requires research and careful consideration.  

Finding the right lender is a crucial and challenging task for borrowers. A lender can make or break the entire process. However, with many lenders out there, you may find it daunting and time-consuming to go over each one. Fortunately, commercial loan companies like leverage experienced brokers with a vast network of lenders to help you find the best loan for your needs.  

6 Considerations Before Getting A Commercial Property Loan

Besides finding the right lender, there are several additional tips for this process. Here are 6 things to consider before getting a commercial property loan.

Credit Score

Most lenders require borrowers to meet at least the minimum credit score threshold for a commercial property loan. However, scores can vary depending on individual lender requirements or other lending factors that affect risk assessment and approval rates. 

Some lenders require a higher credit score to qualify for commercial property loan financing than a residential mortgage loan. Some may even refuse applicants with scores below the minimum threshold. It’s best to check your credit score before you get in touch with a lender. This way you can be as prepared and proactive as possible. 

Debt Service Coverage Ratio

A debt-service coverage ratio (DSCR) measures the owner’s ability to make mortgage payments and cover operating expenses. The DSCR also compares a property’s net operating income (NOI) to the owner’s mortgage payments. Your DSCR ratio can help lenders determine whether you’ll be able to maintain your mortgage obligations. The higher a property’s NOI relative to its debt service, the more sustainable it can be.

The Type of Loan You Want

There are various types of commercial property loans to choose from. Your choice should depend on your preferred interest rate and loan term. Ensure to select the loan type best suited for your business needs and your budget. Doing so will be beneficial in the long run. Below are some types of commercial property loans to choose from.

Commercial Fixed-Rate Loan

The interest rate on this type of loan is fixed for the life of the loan. It means that your monthly payments will stay at a certain level, regardless of how high or low inflation gets. 

Commercial Variable Rate Loan 

Your interest rate will be ‘variable.’ This means that with higher inflation rates, your monthly payment could go up. 

Commercial Interest-Only Loan 

You’ll only pay the interest for a fixed period on this loan. Then, at the end of that term, you’ll need to repay both principal and interest as well as any additional costs accrued. This type of commercial property loan allows the borrower to have better financial leverage at the beginning of the project.

The Down Payment You’re Willing to Provide

Another factor that you must consider before getting a commercial property loan is the down payment. A commercial mortgage loan may require a much higher down payment than what’s usually asked for residential properties, so you must know how much you can afford before you commit.

The higher the down payment you can provide, the less risky your proposition is. In addition, lenders might be more willing to give a lower interest rate.

Monthly Cash Flow

Ensure that you have enough cash flowing in every month so you can manage your monthly payments. Determine the commercial property location you want to purchase and research how much customer traffic the area gets daily. It’s essential to know how many people come into your business every day. If you’re not generating enough income, it may be challenging to make loan payments. 

Lenders might also want to see that you have a clear plan for how your monthly payments will be met. For example, they may look over your past financials for the previous months to see if your cash flow will be enough to repay the loan.

Any Potential Obstacles

Are you aware of any potential obstacles, such as zoning restrictions or covenants on the property that may prevent its usage for business purposes? 

If you are, and there’s a solution to the problem that all parties can agree upon which doesn’t involve changing the property or zoning restrictions, then you can go ahead with your plans. Otherwise, it’s best to think about how these problems might affect your business before proceeding with any loan application.

What to Know Before Getting a Commercial Property Loan – Summary

Getting a commercial property loan is essential for business growth. However, it would be best to consider the factors discussed above before getting one to ensure that you’re getting a suitable loan for your business.

First, you must consider your credit score and the type of loan best suited for your business. Second, if you’re looking to borrow money to grow your company or expand operations, think about your monthly cash flow. Finally, consider other obstacles that might prevent the property’s usage for business purposes.

For more articles like this, be sure to visit the small business section of the site!

2 comments on “What to Know Before Getting a Commercial Property Loan

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