Commercial real estate is expensive. While much of that cost is dependent on the property type, whether multifamily, retail, industrial or special-purpose, most business owners or property investors do not have the available capital to purchase out of pocket. Most require loans from any of several financial lenders:

• Banks
• Certified Development Companies
• Small Business Administration
• Other private lenders

No matter the lender the process of securing a loan is similar, and it requires that you understand so that you can position yourself in the best light possible. Understanding the loan process will allow you to have realistic expectations before submitting your first application.

Understanding Filing Options

The first part of understanding a commercial real estate loan is to understand the filing options. You can either apply as an individual investor or as a business entity. Depending on the age of your business, an investor with sound credit history may be required for loan approval. However, if your company has a strong credit rating and proven revenues, then applying as an entity may be the best option.

Evaluating Mortgage Options

Commercial mortgages are not the same as residential mortgages. Business loans have limited term limits between 5 and 20 years, and interest rates for these loans are usually higher than traditional mortgages. Lastly, commercial financing does not have the same guarantees as more secured residential mortgages, making it a riskier investment for a lender, which is why there are strict requirements for approval.

Calculating LTV

Understanding the loan-to-value metric before applying for a loan can help you determine potential financing rates, or at least understand the rates you receive. The ratio is determined by dividing the loan amount by the appraisal or purchase price. The lower the LTV value, the better for your potential rates.

Comparing DSCR

The debt-service coverage ratio is used by lenders to determine if a property is capable of covering or servicing the loan or debt. Mainly, this ratio helps a lender determine if a business has healthy cash flows, allowing it to cover the additional responsibility of the loan.

Commercial real estate is expensive, and it can be difficult to receive financing if your business does not already have a proven credit history. Fortunately, understanding the process and the assessments used to determine eligibility can help as you move forward with the application process. The main thing to consider is your companies fiscal health and responsibility, as long as you can prove these things, you should be able to find a lender willing to finance your next endeavor.