The Seven C’s of Commercial Lending

Credit

Your credit has to be good, and problems need to be explained and supported with valid documentation.  Most lenders require a 650 or above mid fico score. Now some lenders will lend with FICO scores between 600 to 640 but when they do you will more than likely pay a higher interest rate on your loan or you can expect to be charged more for the transaction.  Just like the residential business you have subprime commercial mortgage lenders that penalize the borrower for having anything less than perfect credit. Now your credit is probably the most important part of the loan transaction. If your credit is marginal and past history demonstrates that you have always had bad credit, then more likely your loan will not be approved.

Capacity

Your business must be able to support its debts and expenses, and must be profitable.  You need to provide 3 years of business tax returns and the most recent year to date profit and loss statement with your loan request. Lenders are looking for the ability of the business to service its current and future debt and the rule of thumb is to look at the last 3 years of returns. What a lender is looking for is that the business continues to remain profitable every year.  With a profit and loss statement the lender is looking for the cash flow strength of the business. No cash flow, no loan it is that simple.  Even if you try to convince your lender that by giving you this loan you will make a lot of money and pay back the loan it won’t work.

Capital

Money you or your investors are putting in or equity you already have in the business. Lenders will always want to make sure that the borrower(s) have “skin in the game” or what is commonly known as equity. It is basically the amount of risk that a borrower has in the transaction. There is no such thing as 100% financing.  Most lenders want to see at least 20 to 50 percent equity into the transaction and the reason is simple. If something goes wrong with the deal and you have a lot of cash infused into the transaction you will do whatever you can to save the loan and make sure it does not go into foreclosure.  Now just to clarity equity is cash in the deal. It is not equity that has been accumulated because you purchased the land twenty years ago and over time it has not increased in value.

Collateral

The value of the assets that secure the loan. Every lender will require some sort of an appraisal on the subject property it is a necessary evil in the commercial lending business. The appraisal has to be ordered by the lender from a 3rd party vendor that has no relationship in the transaction other than the report.  Lenders want to make sure that results of the report are not skewed or influenced in anyway.  Do not order an appraisal until your loan is approved.

Character

Of the borrower and guarantor(s).  When a lender requests your resume they want to see what you have been doing for the last five to ten years. Your past performance will indicate the probability of future success.  If you have a proven track record of being a real estate investor that can be documented then your loan results should be favorable. If not, then you will have to explain in detail why you are good candidate for this loan.

Conditions

The economy, industry trends, of anything that will affect your business.  Lenders will pass on deals because they will have access to information that will give them the broad picture of what is going in the industry.  For the last two years hotels, motels, gas stations, and car washes have been extremely difficult to finance since they rely on discretionary income from consumers. In other words any real estate transaction that relies on a customer base to stay profitable might be overlooked for financing until the economy gets better.

Commitment

Your ability and your willingness to succeed which involves guaranteeing the debt personally even if the company can’t pay it.  Lenders always want to make sure that their borrower(s) are just as dedicated to getting the loan financed just as they are.  Lenders want to make sure that the borrower(s) have the financial stability to stay afloat during the bad times. Commitment on behalf of a borrower can be the difference between a yes and no approval.  If the borrower is asset heavy but cash poor then you can expect an unfavorable loan decision.