Obtaining a business property loan will be easy if you take into account these eight things. To begin with, if you have a home loan, you probably think that business property loans are rather similar. Nevertheless, although there are some main requirements clients must meet, which do are the same, there are also particular eligibility standards when it comes to business loans. It means that knowing a lot about home loans does not make you an expert on business ones, as the criteria for obtaining them are rather different. What is more, the requirements for obtaining business property loans are highly variable. However, make sure to avoid common mistakes by following the eight tips and prepare a perfect business loan application. Here they are:
1. Be sure that the cash flow of your company is good
This requirement is actually the same as in the case of individual loans. Banks need to be sure that your cash flow is sufficient. Business property loans are not comparable to loans aimed at supporting start-ups in their early stages. To get a loan for a property, a company needs to show that it generates a significant profit, that the future is bright, and that the capacity for repaying the loan is sufficient. Hence, if your company is in trouble or just at the beginning of a life cycle, better skip applying for a property loan.
2. Have a clear and realistic plan on generating and using returns from the property
Banks are not interested in how you plan to use your house. However, the plan of use is required in the case of business property loans. You should demonstrate the role of property in your general business strategy. It will significantly influence the structure of your loan and the transaction process. To illustrate, the role of property for a manufacturer who needs factory space is different than a property needed by a retail business to host its retail outlet. In a case you plan to buy and then rent property, you will need to document how you will secure tenants.
3. Think about current market conditions and in the near future
Banks are not likely to approve business property loans when the market is weak or during the recession. On the other hand, property prices rise when markets are high, so purchasing might not be profitable. Hence, you need to choose the right moment to buy a property.
4. Prove the capacity to repay the loan
Even in cases when your cash flow is satisfactory, the lending institutions want to be sure that your purchase decision is justified and that your capacity to repay the debt is substantial. Your Debt Repayment Ratio will be calculated by dividing your net operating income by your total annual debt burden and it needs to meet the criteria of a lending institution.
5. Don't rush with submitting your supporting documents
Usually, it is necessary to prepare more supporting documents for business property loan applications than for home loan applications. The supporting document might include plans on using the property, a formal valuation of the property, income and expense statements showing how the property will bring income, and your business’s financial statements. Also, keep in mind that typically the lending institution will send you a Letter of Offer at least 15 days after the submission of all supporting documents. Take this into consideration when setting your timeline.
6. Budget for your down payment and extra costs
This is crucial for the reason lending institutions typically do not provide funding for more than 90 percent of your prospective property’s appraised value. Hence, you will need to ensure the down payment and extra costs such as administrative and legal fees during the transaction. Don't forget to include costs for an agent or renovation.
7. Conduct an appropriate risk analysis
Actually, when thinking about buying a business property, the first step always should be making a good risk analysis. You need to be sure that it contributes to the growth of your business. Also, include long-term business goals and take into consideration the possible recession.
8. Apply for the right loan package
There are so many loan packages offered by different lending institutions, that it is necessary to analyze in-depth all alternatives before deciding which one is the best for your business. Some packages are customized for companies aiming at investing in commercial property, whereas other packages are tailored for warehouses, shopping malls, office units, and factory space. Applying for the right package greatly enhances your chances to actually receive it.
Typically the most important step is to carry out in-depth research. The same goes for selecting and submitting the application to a lending institution for a business property loan. Make all preparations on time and be sure not to make common mistakes. If you follow the tips, applying for the loan should be an easy and quick procedure.