Can I apply for a commercial mortgage

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Can I apply for a commercial mortgage

If you want to purchase a commercial property for establishing a new business or expanding an existing one, but you have a funding gap, then commercial mortgages can be a great solution. Businesses can opt for a commercial mortgage at lower interest rates by pledging their available property as collateral. These types of business mortgages are generally associated with bigger loans, over a longer term. This is because a commercial mortgage loan is a fixed asset, and the value does not depreciate over the course of time.

Clearing up the myths related to commercial mortgages

However, there are many misconceptions and myths related to commercial mortgage loans, so it is therefore really important to be aware of the facts and have accurate knowledge on how they work before coming to a decision about whether they are right for you and your business. The following discussion will focus on the essential aspects of securing a commercial mortgage including the characteristics lenders look for when approving a commercial loan. The discussion will also touch on how the application process works as well as the different types of commercial mortgage loans available.

Commercial finance is used for the purchasing or procurement of commercial property. As standard, lenders demand that the business requesting the loan should have at least a 51% ownership of the building which is being placed as collateral. In addition, lenders also look for other guarantees that you are safe to lend to. These may include factors relating to; the finances of the business, the personal finances of the business owner and the characteristics of the property. We will look in more detail at these factors below.

The finances of the business

On the whole, applications for commercial real estate loans are subject to higher levels of scrutiny and checking as compared to residential mortgage loans. Therefore, commercial lenders and banks need to go through the accounts of a business in order to find out whether they have the necessary cash flow for repaying the loan. Lenders calculate the debt service coverage ratio of a company; this figure is obtained by dividing the annual net operating income (NOI) of the business by the annual total debt service. The annual total debt service is the amount that will be spent by a business on paying back the principal and the interest on the commercial mortgage loan.

The minimum acceptable level for a debt service coverage ratio is 1.25 for a commercial finance loan. Lenders will also review the credit score of a business in order to determine its access to a commercial loan and the associated terms such as the payback period, requirements of a down payment, and interest rate. In addition to this, a small business would also have to be classified as a limited liability entity in order to secure a commercial mortgage. Sole traders would only be eligible for personal and not commercial mortgages.

Personal finances

The next crucial factor that lenders look for in a business when deciding whether they are eligible for a commercial mortgage is the personal finances of the owner and partners. Many banks and commercial lenders will check the personal credit score of the business owner. Lenders also usually review the history of financial problems experienced by the owners and partners, taking into account things such as court judgments, defaults, and tax arrears. If the personal credit score of the owner is low, then you will have limited chances at getting approval for a commercial mortgage.

Property features

The value of the property that will be financed by a commercial mortgage loan also matters significantly to lenders. As mentioned before, the business should own 51% or more of the building in order to be eligible for a commercial loan. Some hard lenders could take property value as the sole criterion for granting a commercial mortgage loan. Single-family residences cannot qualify for a commercial finance loan, but a multi-family residences can qualify if a business is run at the residence. However, the business should occupy a minimum of 51% in the property.

Different types of commercial mortgage loans

Now that the essential criteria for being eligible to procure a commercial finance loan have been clarified, let’s take a look at the different types of commercial finances.

SBA Loans

SBA loans are commercial finance loans which are backed up partially by the Small Business Administration (SBA). The SBA is a government entity which can repay a certain portion of a commercial mortgage if the business fails to repay the loan. The SBA does not provide loans directly; only specific lenders certified by the SBA provide the SBA loans. SBA loans are generally associated with a higher loan amount, longer terms for repayment, and lower interest rates. However, the application process can be very lengthy for SBA loans.

Business lines of credit

Business lines of credit are also a viable instrument for obtaining the necessary commercial finances for a business. Through this facility, businesses are able to gain a certain credit limit from the business lines of credit.

Invoice financing

Another favorable alternative to commercial loans for businesses is invoice financing. This type of commercial financing involves businesses using their outstanding invoices as collateral.

Term Loans

Term loans also serve as a straightforward, traditional form of commercial financing. Businesses can receive a lump sum amount that will have to be paid off in regular payments with interest. One of the setbacks of term loans however, is the rigidity of terms required to qualify for this type of loans.

Short-term loans

Short-term loans can also be helpful in securing a commercial mortgage. However, the drawback, in this case, would be lower loan amounts and higher interest rates. Businesses in need of fast financing can make the most of short-term loans.

Some crucial factors that you need to be aware of:

It’s important to take note of the following points before applying for a commercial finance loan:

  •               Businesses should evaluate their finances and check whether they could comfortably repay the monthly payments for the mortgage.
  •               Evaluate the property characteristics in detail so that you know it is suited to your requirements as well as those of lenders.
  •               As discussed above, there are many different types of commercial financing loans, just as there are many different types of lenders. Therefore, a business needs to choose its lender carefully in order to get the best deals on commercial finances.
  •               Cash flow estimates can also help in creating a strong case for your business in the eyes of a lender.
  •               Another vital document that is crucial in securing a commercial finance loan is a business plan. Detailed business plans with accurate predictions for the future attract the confidence of lenders and can ensure a more advantageous deal on commercial financing.

If you make sure that these factors are aligned perfectly with the preferences of the lender, then it should be easy to get a commercial mortgage.