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What Types of Commercial Lending is out there in todays’ marketplace?
I am very excited to get involved and start originating commercial loans. What different types of commercial loans is Lending Network, Inc. going to offer to real estate investors and business folks?
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3 Replies
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The commercial lending marketplace offers various types of financing options to meet the diverse needs of businesses. Here are some common types of commercial lending available in today’s marketplace:
- Term Loans: These are traditional loans that provide a lump sum of capital upfront, which is repaid over a fixed term (typically 1 to 25 years) with interest. Term loans can be used for a variety of purposes, such as purchasing equipment, real estate, or funding business expansions.
- Lines of Credit: A line of credit provides businesses with access to a revolving pool of funds that can be drawn upon as needed. Interest is only charged on the amount borrowed, and the available credit is replenished as payments are made. Lines of credit offer flexibility and can be used for working capital, inventory, or bridging cash flow gaps.
- Commercial Mortgages: These loans are specifically designed for purchasing or refinancing commercial real estate properties, such as office buildings, retail spaces, industrial facilities, or multi-family residential properties. Commercial mortgages typically have longer terms (5 to 25 years) and may require a higher down payment compared to residential mortgages.
- Small Business Administration (SBA) Loans: The SBA partners with lenders to provide various loan programs designed to support small businesses. These include the popular 7(a) loan program for working capital, equipment, or real estate, and the 504 loan program for purchasing fixed assets like real estate or machinery.
- Asset-Based Lending: With asset-based lending, businesses can leverage their assets (such as accounts receivable, inventory, or equipment) as collateral to secure financing. This type of lending is often used by companies with limited operating history or those experiencing growth or turnaround situations.
- Equipment Financing: These loans or leases are specifically designed for acquiring equipment, machinery, vehicles, or other essential assets for a business. Equipment financing can be structured as a loan or a lease, with the equipment serving as collateral.
- Invoice Financing/Factoring: This type of financing allows businesses to sell their outstanding accounts receivable (invoices) to a lender or factoring company at a discount. The lender provides an upfront cash advance based on the value of the invoices, allowing businesses to improve their cash flow.
- Merchant Cash Advances: Primarily used by retail or service-based businesses, merchant cash advances provide a lump sum upfront in exchange for a percentage of future credit card sales or revenue. This type of financing is often easier to qualify for but can be more expensive than traditional loans.
These are just some examples of the various commercial lending options available. The best choice will depend on the specific needs, industry, and financial situation of the business. It’s advisable to consult with commercial lenders or financial advisors to explore the most suitable financing options.
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Qualifying for commercial loans on commercial real estate typically involves meeting certain criteria and providing specific documentation to lenders. Here are some key factors and steps to help you qualify:
- Strong Credit Profile:
- Lenders will evaluate your personal and business credit scores, credit history, and overall creditworthiness.
- Maintain a good credit score (typically above 680 for most lenders) and a clean credit report with no derogatory items.
- Sufficient Down Payment:
- Commercial real estate loans often require a higher down payment compared to residential mortgages.
- Lenders typically require a down payment of 20% to 30% or more of the property’s value.
- A larger down payment can increase your chances of approval and potentially secure better loan terms.
- Debt Service Coverage Ratio (DSCR):
- Lenders will assess your ability to cover the loan payments by calculating the DSCR.
- The DSCR is the ratio of the property’s net operating income (NOI) to the annual debt service (loan payments).
- Most lenders require a DSCR of 1.25 or higher, indicating that the property generates enough income to cover the loan payments with a buffer.
- Provide Detailed Financial Documentation:
- Lenders will request your personal and business tax returns (typically 2-3 years).
- Be prepared to provide financial statements, income and expense reports, and rent rolls (for income-producing properties).
- Gather documentation related to the property, such as appraisals, environmental reports, and lease agreements.
- Demonstrate Industry Experience:
- Lenders prefer borrowers with relevant experience in owning, managing, or operating commercial real estate.
- If you lack direct experience, consider partnering with someone who has a proven track record in the industry.
- Solid Business Plan:
- Develop a comprehensive business plan that outlines your investment strategy, projected income and expenses, and plans for managing the property.
- Clearly articulate your exit strategy and how you plan to repay the loan.
- Consider Lender Relationships:
- Explore commercial lenders with whom you or your business has an existing relationship, as they may be more inclined to work with you.
- Local or community banks and credit unions may also be more open to considering your loan application.
- Seek Professional Assistance:
- Consider working with a commercial real estate broker or loan officer who specializes in commercial lending.
- They can guide you through the process, help package your loan application, and identify suitable lenders.
It’s important to note that commercial real estate lending requirements can vary among lenders, and the approval process is often more rigorous than residential mortgages. Being well-prepared, presenting a solid financial profile, and demonstrating a deep understanding of the property and market can significantly improve your chances of qualifying for a commercial real estate loan.
- Strong Credit Profile:
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Qualifying for an SBA (Small Business Administration) loan involves meeting certain eligibility criteria set by the SBA and the participating lender. Here are some key requirements and steps to help you qualify for an SBA loan:
- Meet the SBA’s definition of a small business:
- The SBA has size standards based on industry, measured by the number of employees or average annual receipts.
- Your business must meet the size standard for your specific industry to be considered a small business.
- Be a for-profit business:
- SBA loans are generally only available to for-profit businesses operating in the United States or its territories.
- Demonstrate good character:
- The SBA looks at the personal and business credit history, criminal records, and overall trustworthiness of the business owners and key management.
- Have reasonable owner equity invested:
- The SBA typically requires business owners to have a significant stake in the business, usually at least 10-20% equity injection.
- Provide collateral:
- Most SBA loans require collateral, such as real estate, equipment, or other valuable assets, to secure the loan.
- Meet lender’s underwriting criteria:
- SBA loans are made through participating lenders, who have their own underwriting criteria in addition to SBA requirements.
- This may include factors like credit scores, debt-to-income ratios, and cash flow projections.
- Prepare a comprehensive business plan:
- A well-written business plan is essential, demonstrating your industry knowledge, market analysis, and growth strategies.
- Provide required documentation:
- You’ll need to submit various documents, such as personal and business tax returns, financial statements, legal documents, and proof of collateral.
- Have a sound business purpose:
- The loan must be used for an eligible business purpose, such as working capital, equipment purchases, real estate acquisition, or business expansion.
- Explore SBA loan programs:
- The SBA offers different loan programs, each with specific eligibility requirements. Common programs include 7(a) loans, 504 loans, and microloans.
It’s important to note that the SBA loan application process can be lengthy and documentation-intensive. Working closely with an SBA-approved lender and seeking guidance from organizations like SCORE or Small Business Development Centers can increase your chances of success.
Additionally, the SBA may have temporary initiatives or relief programs in response to economic conditions or disasters, which could provide additional opportunities or relaxed requirements for certain businesses.
- Meet the SBA’s definition of a small business: