If you own a business and are ready to make the move to a brick and mortar establishment or would like to own your brick and mortar instead of rent; you face a large expense of purchasing your own building. Purchasing a new commercial building gives you two options of purchasing: you can save up the funds to buy it in cash, or you can take out a loan.
Saving up funds could take a large chunk of time while taking out a loan will enable you to jump-start your plans and dreams a whole lot quicker. When you put it this way, it seems easy to go for the commercial real estate loan, but choosing to take out a loan on a commercial property is not so black and white. There are many factors to consider before borrowing a large sum of money for your business.
Here are some things to consider before deciding to sign a chunk of your profits away.
- The more affordable the loan is, the longer it will take to pay off the loan: Some loans may seem very reasonable and super affordable to make monthly payments on. In most cases, these loans will have much longer payment lifespans. Some lifespans can last decades, yes they take less profit away upfront, but they also extend the period of debt and cost way more in interest.
- Bigger Down Payments are Better: The more of your own money you can put down on the property upfront, the less money you will owe a lender, the less risk you will seem to the lender, and the better the terms (like interest rate) you will receive.
- Can You Wait?: Of course, with any loan, you take out you end up paying more than the actual amount that was lent to you back to the lender in the form of interest. This is why lenders get into the business of lending in the first place, to make money. So you have to ask yourself is your business doing well enough and do you see your projections being stable enough to take on giving away your profit in the form of interest to a lender? Will having a new building launch your business into strong financial success where this is a small trade-off that won’t really matter, or should your be a little more patient until you have more money saved up and a larger stable client base?
What are the Chances of Qualifying for a Commercial Real Estate Loan?
The chances of qualifying for a commercial real estate loan are largely dependent on the type of loan you are applying for. There are some factors that will help your approval success for all types of loans and those include:
- Credit Score: a high personal credit rating is hugely beneficial when not just applying for personal loans, but business loans as well. Hard money real estate loans will require at least a 550 credit score or higher and a traditional or SBA loan is going to require a credit score of 700 or higher from most lenders.
- Collateral Value: Real estate loans are asset based, so the property you are hoping to get a loan for will act as the actual collateral for the loan. This means the lender can sell off the property if payments are not made or caught up on in a certain amount of contracted time. This means a lender will want to know the actual value of the property to assure the likelihood of making their money back should the loan default.
- Age of the Business: the longer your business has been business the less risk you are to a lender and the better chances you will have of approval and your loan terms will be better as well.
- Debt Service Coverage Ratio: This is your net annual income divided by your loan payments. Lenders use this to get an idea of if you can afford the monthly loan payments. If your ratio number is 1 lender believe you are a safe bet to make payments on time.
There are many things to consider when thinking about how to finance commercial real estate. If you have questions about how to finance a commercial property for your business asking your commercial real estate agent about trustworthy loan officers is a great place to start.
For commercial real estate in Snohomish County Washington and surrounding areas please contact us any time.