The process of commercial loan borrowing is intricate, and costs a lot of time and money. Before applying for a loan, consider these tips to better prepare yourself for what’s to come!
Tip #1: There are a multitude of rates and options — and they’re not always available at your corner bank.
Unlike with residential mortgages (which deal with only ONE property type), there isn’t “one rate” for all commercial loans. Even though some agency loans such as Freddie Mac and SBA publish their rates, those rates are still subject to adjustments.
Commercial loan rates and terms are dependent on multiple factors, which assess the risk of the investment. With that being said, it is very important to look at each and every factor when considering a loan. While a rate might look good, there could be another element of the loan that doesn’t fit in with the rest of your strategy – making a big difference in the cost of your money. Be sure to carefully consider all of the elements, not just the rate, and make sure they’re a fit with your overall investment strategy.
Be aware, most corner banks are getting more conservative: their fixed periods are going down, average amortization terms are now 20 years (versus 25 years in the recent past), and LTV’s are going down, all to cover their now higher risk of lending. Since there are so many types of commercial loans available, it’s best to begin the process by working with a commercial loan specialist to fully explore the wide breadth of rates and options available for your unique loan requirements.
Tip #2: You’ll be required to produce financials and tax returns – have them ready.
For most commercial loans, you’ll need to provide two to three years of business and personal tax returns, depending on the loan type you’re pursuing.
In addition, make sure your personal financial statement is current. If you haven’t updated yours in a while, now is the time! Make sure to include the current value of any properties you own (make sure they’re accurate; don’t inflate!); and check the recent balances on any loans or debts, including car payments and credit cards. These values will determine your net worth and liquidity (assets – liabilities = net worth). In addition, check the balance of your bank accounts, broker accounts, and any cash equivalents. This is one of the key considerations in securing your commercial loan!
Tip #3: Know Your FICO Score.
Before applying for a commercial loan, make sure to review your credit and FICO score and address any errors or discrepancies proactively.
Please note: just because you have a credit challenge, it doesn’t necessarily mean you can’t get a commercial loan. It will, however, limit your options and add time to the process – so be prepared. Sharing any inaccurate information with your commercial loan specialist beforehand will actually serve you better than withholding it until the last minute. A good commercial loan specialist will be able to advise you on how to address your credit challenges, and may be able to secure alternative loan options based on your personal credit history.
On the other hand, if you have great credit, it’s important to share that information, rejoice and share that information immediately! Having great credit is a huge asset in qualifying for the best loan options.
Tip #4: Be prepared for associated loan expenses.
Borrowing money requires some level of personal investment, so make sure you are prepared for these costs.
For example, a conventional loan may require you to put down more cash than a business loan. Or, say a property needs improvements – you should have the cash budgeted to pay for an estimate to provide to the lender if you intend on using the funds to make those improvements.
Bottom line, have enough cash seasoned and available, to both assist you with the closing costs and to support unexpected expenses that may arise. (“Seasoned” = money can’t magically appear in your account in the last week before your closing. PLAN AHEAD!)
Bonus tip: Another benefit of working with a commercial loan specialist is that they’re able to assist you in projecting the total costs required – including down payment, closing costs and reserves. A specialist will also advocate for the you during the entire loan process, rather than simply matching the you to a loan and leaving you to fend for yourself.
Tip #5: Average closing times for commercial loans vary WIDELY, depending on the loan – know yours.
Some people just assume that they can run down to the bank and get a loan, just like when buying a house. They rush into signing contracts and putting down hard money deposits, only to realize that they can’t close their commercial loan in time. Don’t wait until your deposits have gone hard and are non-refundable to find out that you didn’t give yourself enough time to close! Then, you’ll be at risk of losing the contract on the property and losing your own deposit money. What a nightmare!
Here are examples of some average closing times to consider: Conventional loans typically close in 30 to 45 days. Meanwhile, an SBA 7a loan averages around 45 to 60 days to close, and an SBA 504 loan averages 60 to 90 days.
These are general estimates that can be affected by weeks or months, depending on how complex the loan is (like a business with multiple owners or multiple requirements), and how large the loan amount is (requires more due diligence), and even what time of year it is.
Tip #6: If you plan on securing a loan in the final quarter of the year, get it in before the end of October!
There are many third parties involved in a loan contract – appraisers, insurance agencies, CPAs, environmental scientists, title companies – and they will all start taking time off for the holidays come November. If you hope to close your loan in the final quarter of the year, make sure to submit your loan application and all of your documents before the end of October to avoid complications due to holiday delays.
Bonus Tip: In addition to the end-of-the-year holidays, loans can also experience delays during Spring Break or Easter, as well as summer vacation. Make sure to be proactive in submitting your loan around these times!
The more prepared you are for your loan application, the easier it will be throughout the process for both you and the lender. However, even if you’re prepared to the best of your ability, situations and kinks may arise that you are unprepared to handle alone. That is why it is highly recommended that you begin the process with a commercial loan specialist, like the professionals at Commercial Capital Ltd., FL. From application to close, the commercial loan specialists at ComCapFL will put their years of experience to work for you, addressing any situations that may arise, to make sure you arrive successfully at a closing.
Getting a commercial loan is a huge undertaking. Be prepared. Have the right commercial loan specialist as a partner in the process and save yourself both time and headache!