Mission Peak Brokers provides loan brokering services for clients seeking commercial loans to buy commercial property, commercial construction and refinance existing business loans. We have years of experience buying, constructing or refinancing industrial plants, warehouses, retail buildings, office buildings, multi-family properties, investment properties, hotels and motels.
The following information provides basic information regarding the types of commercial loans and how to qualify. If you would like to speak with one of our loan brokers regarding your specific commercial real estate loans financing needs, please call us at (510) 490-9700 or contact us.
California Commercial Real Estate Loans
There are two main types of commercial real estate loans: traditional bank loans and Small Business Administration SBA loans.
Traditional commercial real estate loans are provided by banks. Bank commercial real estate loans are typically approved for borrowers who are creditworthy and profitable businesses.
The SBA has two loan programs that can be used for real estate: The 7(a) and the CDC/504 loan programs. The 7(a) program is a general purpose business loan that you can use for many different business reasons, including buying and repairing commercial property. The term is 25 years for real estate, and rates are in the range of 7% to 9.5%.
The CDC/SBA 504 loan helps small businesses purchase and upgrade capital-heavy assets, such as commercial real estate and equipment. These 504 loans have lengthy terms (20 or 25 years) and some of the lowest fixed rates around (starting 5%).
Commercial Construction Loans
Construction loans are taken out to cover the material and labor costs of building structures like offices, retail fronts, industrial facilities, multi-family rental units, and more. If the undeveloped land has already been purchased, it can be utilized as collateral for the construction loan (as can the building materials).
Construction loan terms range between 18 and 36 months, usually leading into a long-term mortgage.
Like a home mortgage, business owners can take advantage of lower interest rates through commercial real estate refinancing loans. There are additional fees and costs involved when refinancing, but they’re usually minimal compared to overall savings through lower monthly payments and less cumulative debt. Refinancing can also improve cash flow through improvement or expansion of commercial properties, and pay off looming expenses like a balloon payment on an interest-only loan.
Qualifying For Commercial Real Estate Loans
What does it take to qualify for a commercial loan? Like mortgages, lenders look at your creditworthiness, the value of the property, business performance, and debt coverage service ratio.
Your Credit Score
The commercial real estate loans you can qualify for depend on your credit score. Lenders prefer borrowers who have a track record of paying back their debts on time. To evaluate your creditworthiness, lenders will look at your personal credit score AND your business credit score. While there’s no specific score to secure financing, with a credit score of 700 or higher, you’ll have the most preferable commercial real estate loans available to you.
Real Estate Collateral Value
A loan for commercial real estate is an asset-based loan. This means the property itself acts as the collateral for the loan. If you default on the commercial real estate loan, the lender has a lien on the real estate and. therefore, the legal rights to seize the property and sell it off to satisfy the debt.
Since the property value affects the lender’s security interest, lenders will want to see a full valuation and appraisal of the property to assure that it’s value will be sufficient to protect the lender’s assets.
Time in Business
Commercial real estate lenders will consider your time in business before approving your commercial real estate loan. The younger your business, the riskier your business is for a lender. Established business owners have already proven that they can successfully run a small business. This gives the lender greater certainty that the business owner/borrower will be able to pay back the loan.
A business that has been operating for at least three years has the best chance of qualifying for commercial real estate loans.
A lender may also consider previous management experience before issuing you a commercial real estate loan. Having substantial experience running and growing a business helps prove that you’re a good candidate for the loan.
Debt Service Coverage Ratio
Commercial real estate loans can have a significant impact on your business budget For this reason, lenders want to assure that you have the financial capacity to pay off the loan comfortably. One way to prove that you have enough money to cover the monthly loan payments is to consider your debt service coverage ratio (DSCR). DSCR is a measure of a company’s cash available to pay its current debt obligations.
DSCR is calculated by dividing the annual net income (sales minus your expenditures) by annual loan payments. For example, if net income is typically $300,000 a year, and annual loan payments will be $50,000, the DSCR is 6—which is very healthy and shows that the business profits sufficiently to cover the debt.
A DSCR that’s greater than 1 means your business has more than enough profit to make loan payments. A DSCR of 1 says that you have exactly enough cash on hand to make your loan payments—but not much cushion for unexpected costs. A DSCR of less than 1 indicates the business is operating with negative cash flow and there’s not enough cash to meet the debt obligations.
Lenders usually look for a DSCR that’s greater than 1.2 when evaluating your commercial real estate loan qualifications.