If you’re looking for a commercial property loan calculator you might be disappointed to find that while a calculator will work out the repayments on a borrowed amount, there can be a lot more involved in getting a commercial loan than just working out what the repayments will be. And this can work in your favour if you understand what a lender is looking for in your loan application. To start with, most lenders will lend a maximum of 70% on commercial property, but even this is subject to variation depending on the details of the property and of your circumstances.
Loans for Commercial Property Versus Residential Property
Purchasing commercial property can be quite different to buying residential property. For one thing, there is huge variation in commercial properties – everything from a local corner store to a whole shopping centre, from a small warehouse to an enormous manufacturing complex, from a block of 5 units to a sky scraping city apartment building! So while doing a valuation of a residential property involves looking at the size of the block, size and condition of the building and comparing it with similar sold properties in the area, with a commercial valuation the visit can take hours and include all sorts of different land use from car parks and warehousing to factories and apartment buildings. It can also be difficult to find recent sales of similar properties in the local area, so getting a valuation for a commercial property tends to be less clear cut than residential properties.
With the huge volume of residential lending, lenders have been able to get quite specific with their policies about what properties they will lend against and what evidence they require to assess the application. Commercial loans, on the other hand, involve much less technology in their submission and assessment, and more involvement of individual assessors in understanding the applicants and the property involved.
To start our posts on commercial lending let’s look at ‘The Five C’s of Credit’. This will give you a good introduction into how the lenders will look at your commercial loan application, and what factors can make it more successful.
Lenders are looking for evidence of stability. Things that show them you are reliable. So they look at your history to assess your future. This includes consideration of how long you have lived at your current address, how long you have been with the same employer or in your industry, whether you have a history of paying all your bills on time, and what reputation you have. Reputation can be particularly important when looking at big loans. For example, a building company that is renowned for being slow to pay their bills is going to be less attractive to a lender than one who always pays their bills on time.
If you are borrowing money for a business they will want to know how much experience you have in your own business and in the industry. By understanding these aspects the lender can assess how likely you are to succeed in your business and work out what risk there is to the money they lend you.
This is looking at your other debts and expenses so they can work out whether you will be able to pay the loan repayments. They look at how much money you earn against how much money you owe to see if there are funds left over to pay the repayments on this new loan.
They can also look at potential income so, for example, maybe you want a loan to refurbish and expand your manufacturing business because you have a new contract to supply a large number of products over the next 5 years. Even though the contract hasn’t started yet, so it isn’t showing up in your business financials, the signed contract can be included in the application as future income and that can assist the lender with approving the loan.
How much are you worth? They will take the value of your assets, including real estate, vehicles, shares, cash and any other investments, minus your liabilities. The more capital you have, the happier they are because this means you have options if there is a problem with this property. Such as if you suddenly have a long term vacancy in this property you may be able to use your other assets to maintain payment of the loan repayments. This is looking at whether you have a back up plan available or if giving you this loan leaves you potentially exposed. If you’re exposed, the lender is exposed, and higher risk is what they want to avoid.
This is consideration of any assets you have that the lender has a right to take ownership of and use to pay the debt if you cannot make the loan repayments. So they are looking at the type of security that you are offering to secure the loan, and it’s ‘saleability’. In particular they will be interested in whether the premises can be used for other types of businesses, which makes it easier to sell because it is appealing to a wider range of buyers. So, for example, a warehouse with office space has a great range of potential buyers while a service station can only be sold to someone who wants a service station. So the warehouse is much more ‘saleable’ than the service station and any lender would much prefer it as the security for a loan.
This is the one you have the least control over because it relates to the bigger picture of economic conditions. So the lender can look at the local economy and the financial health of the industry that you are in as well as the local market and your competition. They will also be looking at whether the premises will be an investment property or owner occupied, because if it is owner occupied they can look at your business financials to assess whether this is feasible, while as an investment it relies on getting a suitable tenant.
Assessing Your Commercial Loan Application
Every lending assessment in the business/commercial field is individual and is assessed differently. Some lenders develop their own ‘scorecards’ that they use for assessing the 5 C’s. The result of this is that while a residential loan that doesn’t meet the lender’s stated policy will be declined, with a commercial loan the lender is looking at the total picture so while the application might not fit easily into their policy, if the overall deal is good they may still approve the loan.
Telling Your Story!
A big part of commercial lending is how the application is presented and rather than simply stating the figures, needs an explanation to go with it that explains the strengths and weaknesses in the application. The weaknesses need to be mitigated, and the application needs to demonstrate whether strengths in some areas are enough to offset any weaknesses.
I like to think of commercial loan applications as being more ‘creative’ than residential applications. The loan application needs to tell a story for the lender of why they would want to approve your loan and this requires an understanding of the loan applicants and their business. Commercial applications can take longer to put together than residential ones but that is an important part of the process to ensure a full understanding of the factors involved and the best possible ‘picture’ to be given to the lender!
Questions and Comments?
If you are considering a commercial purchase or would like a review of your current commercial loan (s) please get in touch via our Enquiry Form. We can look at what you want to achieve, gather the details to paint that ‘picture’ in the application and find the best lender to meet your needs.
Have you had a commercial loan before? Have you considered purchasing commercial property or are you more comfortable with residential property? Do you have any questions about commercial lending? Please share your experiences so everyone can learn from them.