Beginners look at commercial loans as a means of realising a dream. They long to own their own restaurant, pub or bed-and-breakfast, and look to their friendly local bank manager for help. Cue frustration and disappointment. These days, loans are decided by back-room underwriters, who use cold calculation to decide your credit worthiness. To the seasoned pro, it’s just another day at the office; a handy way of adding to their portfolio. To get the best deal, you need to prepare in advance. Here are a few tips to help you on your way:
1. Have your business plan, forecasts and projections, financial records and statements, history of the property’s income, and the appraisal when you approach lenders. Make sure these are accurate and up to date. This lets the bank know that you mean business. If make them think about your application, they are more likely to deny your loan.
2. Put your own money down. You’ll need at least a deposit and closing costs. Lenders want to share the risk, not own it entirely. They will usually not finance more than 75% of the appraised value of the property. Personal guaranties of the principal owners may be necessary.
3. Get your own appraisal of the property. This will provide you with an unbiased estimate of what the property is really worth. You’ll then know whether it’s worth the financial risk.
4. Apply for your loan as soon as you can. Commercial lenders exaggerate their speed. They’ll quote you forty-five days when it’s more likely to be three months!
5. Never rely on just one commercial lender. Commercial lending is very subjective. Submit your deal to at least four of them.
6. Commercial lenders must order a property appraisal themselves. The bank won’t be allowed by law to accept one ordered by you or a third party.
7. Most commercial lenders now require toxicity reports, to discover any contamination of the site. If a lender forecloses on a contaminated property, the lender inherits the expense of cleaning it up.
8. Lenders near the property generally offer better terms. With those farther away, it’s a case of ‘out of sight, out of mind’.
9. Does your company have a sizable cash flow? You can use the promise of depositing it with the lender to negotiate a better deal.
10. Have a lawyer who specializes in property investment go over everything. You need someone who knows the business and who can be an advocate on your behalf.
11. Be certain that you can afford to keep your business going and still meet your payments. Properties must show sufficient debt-repayment ability. If the property is to be occupied by a sole tenant, the lender will want to appraise that tenant’s finances.
12. Check with your local small business administration for any potential grants or low interest loans you might be able to wangle.
13. Negotiate. You do not have to take the first offer you get. Getting a loan is like buying any other good. People are sometimes too in awe of banks to haggle. There’s no need to be afraid; they can only say no!