Purchasing commercial real estate for your business is a HUGE decision — one that should not be taken lightly. Before you become a commercial property owner, you will need to find a lender to help finance your purchase or construction.
Even if you already have a healthy relationship with a commercial bank, you will want to evaluate all of your options for commercial real estate financing. Choosing the right lender for your project will make a world of difference. You want a lender who understands your needs as a business owner, not just a borrower. You want a “partner” in the financing process.
Before you begin looking for a commercial mortgage lender, there are things you can do to make sure you’re teamed up with the best lender for you. In this report, you’ll learn the 15 secrets to choosing a commercial lender, including what to look for and what questions to ask. Once you’ve read this information, you’ll be equipped to make the best commercial financing decision for you and your business.
1) You Have Options
You deserve to work with a lender that understands your needs. In other words, you don’t have to choose the first lender you talk to, nor do you have to settle for a lender with a small branch office around the corner. Purchasing your commercial property is a HUGE step in the life of your business, and the lender you choose will play a large part in it.
It’s important that you know exactly what you want in a property and in a lender. You should feel comfortable with your commercial lender — you should see him as a trusted partner in the investment you’re making.
2) Choose the Best Loan for Your Business
A good commercial lender will share several loan options with you. You can help expedite the process by educating yourself on the loan basics ahead of time so that you’re well prepared to make the decision on what kind of loan will be best for you. Proper due diligence on your part will make the process much easier.
Commercial real estate financing comes in a variety of “flavors” — each with its own requirements and nuances. The following are two types of loan programs that you’ll be able to choose from:
Conventional Commercial Loan
Ordinary, or conventional, commercial real estate loans have the option of either fixed or variable interest rates (usually only up to 10 or 15 years) and typically require at least a 20% equity injection from the borrower (you). Many business owners find it difficult to come up with the down payment that a conventional loan requires. Keep in mind that additional soft costs and closing costs will likely come out-of-pocket as well. Even if you’re able to afford the 20% down payment AND have enough cash left over to cover closing costs, this is probably not the best use of your capital. There are better ways for you to reinvest this money back into your business instead of tying it up in a non-income producing asset like real estate.
SBA 504 Loan Program
Considered by many lenders to be the “Best Kept Secret in the Loan Industry,” 504 loans offer below market interest rates (up to 30 years), and require as little as 10% down. Another perk of this loan program is that soft costs and closing costs can be rolled in to the total project cost and financed (meaning they won’t have to come out-of-pocket).
The lower down payment and longer-term fixed interest rates make owning property much easier for many business owners to build or acquire their commercial property.
These are just two of the many financing options you have, but hopefully you can see how they differ. There are advantages and disadvantages to each type of financing, and a good lender will be able to explain the best options for your particular business.
NOTE: Be wary of banks — they have the tendency to promote certain products that generate higher “yields” for them.
The loan a bank offers you may be a large revenue producer for them but a poor decision for you. You don’t want to be the square peg being forced into a round hole. More on the “banking mentality” later in this report.
3) Get Pre-Approved As Soon As Possible
A good commercial lender will be able to review some basic documentation (personal financial statement, tax returns, business schedule of liabilities, etc.) and give you a firm idea of exactly how much property you can afford. Though this is a vital part of your purchasing/financing process, it should take no longer than two days. If a commercial lender can’t provide you with a firm Pre-Approval letter within this timeframe, you should keep looking.
Once your documentation has been reviewed, you will be issued a letter or similar document stating you are approved for a certain amount within a specific timeframe. You may be charged a small fee to cover the cost of your credit reports and your application, but don’t let that deter you from this very important step. This fee is often refunded at closing.
The advantages of being Pre-Approved are two-fold:
1) You are more attractive to sellers who often want solid evidence that you can actually afford their property.
2) You’ll ultimately save time because the lender will have already completed the necessary qualifying and underwriting requirements.
A Fast and Timely Pre-Approval Is Absolutely Necessary
Your commercial lender ought to understand that, for small business owners especially, time is a valuable and often a scarce commodity. Some lenders have shortened their Pre-Approval application requirements to as few as seven basic documents. Additional documentation will be required to complete the underwriting process, but a good lender will be able to Pre-Approve you with this information.
Time is a precious commodity in the loan process. It can often mean the difference in getting the property of your dreams or missing out on the opportunity because of unnecessary delays in the approval process from your lender.
You need access to every possible advantage during the loan qualification process. Find a lender who has streamlined the Pre-Approval process and cares enough to help reduce the time it takes to close on your loan.
4) Work with a Specialist Rather than a Generalist
One of the first places most people look for a commercial loan is their local bank. Often times this can be a big mistake.
Banks provide a wide variety of loan options for their customers. Sometimes this philosophy can backfire on the customer (and the banker). The mere convenience of a “one-stop-shop” should not be the deciding factor
Banks offer generic solutions for their business clients. That’s not what a small business or entrepreneur needs when seeking help with a commercial loan. Bankers are considered “generalists” and not “specialists.” Banks often provide a “one-size-fits-all” solution for every customer.
The danger of having too many loan programs under one roof is that borrowers get mediocre service (at best). It becomes a difficult task, even for the most seasoned bank representative to provide professional guidance for their customers when he has to try to understand all the intricacies of a plethora of financial products. Purchasing commercial property is a huge decision — you deserve the level of care and service only an expert can provide.
Too many choices and loan options can often result in mistakes or closing delays. Therefore, you should always work with an expert that specializes in the type of loan for your specific situation.
Working with a specialist will ensure that your financing experience is an efficient and enjoyable one. Think about it this way: Would you rather have a lender that knows a little bit about a lot of loans, or a specialist that is an expert on three or four loan products that are best for your situation?
5) Work With a Lender Focused On Your Immediate Needs
There are many types of lenders available to assist you with your commercial real estate financing. However, it is important to remember that not all lenders are created equal. Do your homework in finding a lender that meets your specific needs.
You want to select a firm that will understand your priorities, offer you the best deal for your company, and complete the loan process in a timely manner.
Non-bank lenders (such as lenders that specialize in commercial real estate financing) fit this profile because they focus on providing niche products and loan options. They are experts in the products they offer. Banks are more “traditionally-minded” in their financing approach, while non-bank lenders are more entrepreneurial and creative.
Additionally, banks often require you to transfer all of your other financial accounts, including deposits, checking accounts, lines of credit, etc. Non-bank lenders, however, only work with your real estate loan and allow you to maintain your current banking relationships.
6) It’s Smarter to Make a Smaller Down Payment
You want your lender to help you secure a loan that provides the greatest flexibility to use more of your capital as you see fit for your business. The lower your down payment, the more flexibility you have to invest in your company and get a higher cash-on-cash return on your commercial real estate investment.
In weighing your financing choices, remember that some debt is good. Don’t assume you should take the loan with the highest down payment requirement so you can “pay off your debt faster.” Putting down capital for your investment property means you have less to invest in your business. This makes it harder to grow your business and could make you more vulnerable to situations that require quick access to capital.
The degree of growth and development of your business often hinges on the amount of capital or “cash-on-hand” available to your company. Available capital is a vital component for growth and expansion. Therefore, it makes the most sense to conserve as much of your capital as possible when investing in a non-income-producing asset such as real estate.
7) The Longer the Amortization, the Better
Real estate costs are the third largest business expense, behind payroll and taxes. With longer loan amortizations, your monthly mortgage payments are likely to be less than what you would pay to rent. In other words, owning your own commercial property instead of leasing may actually be more affordable (not to mention extremely beneficial), depending on current market conditions.
Longer amortizations (over 20 years) will have less of an impact on your cash flow (and will often improve it). A good commercial lender will be able to run an extensive analysis and give you a clear understanding of your options and the variables, including monthly rental costs vs. monthly loan payments and the benefits of each.
Growing businesses need to stretch debt repayment terms as much as possible, since it will allow you to invest excess capital toward more growth. Choosing a longer amortization for your commercial real estate loan is an extremely smart decision when you are able to get a low, long-term fixed interest rate. The key is to invest your valuable capital where it will do the most good for your business (usually not your commercial property). Another thing to keep in mind is that many commercial loans give you the flexibility to prepay (for instance, up to 20% of your outstanding principal each year) when you do have excess capital.
8) Look for a Lender with an Entrepreneurial Mindset
Banks have their place in the financial arena; however, a bank is probably not your best option for a commercial loan. There are several reasons for this:
o Banks are structured as large corporations and typically have many layers of management. This generally only serves to cause delays. Also, the more hands involved in the loan approval process, the greater the chance of something going wrong.
o Banks also have a tendency to be ultra-conservative. They’re not known for their creative approach to financing. In fact, banks have a reputation of being just the opposite.
Conversely, non-bank lenders are known for their entrepreneurial mentality. They will find a way to get your loan approved and closed, and do so with a creative mindset. Non-bank lenders, especially those that specialize in niche products, are more flexible and ultimately better able to provide the level of service you deserve in a commercial lender. They’re known for “thinking outside the box,” and making sure each borrower gets the best deal and the best treatment.
Entrepreneurial-minded lenders are often small business owners themselves. It’s always easier doing business with another “like-minded” individual than with a large corporation.
The bottom line is that non-bank lenders take more of a personal, “hands-on” approach to the commercial real estate financing process, and are willing to get your loan underwritten and approved as quickly and efficiently as possible.
9) If Construction is Involved, It’s a Whole New Ballgame
If your project involves construction (ground-up or renovations), you need to make sure your lender is capable of handling it properly. There are a lot of moving parts to commercial construction, and unless a lender has ample experience with it, it can be very messy. A good lender, who has a lengthy track record of handling commercial construction, will be an enormous asset to you during the construction process. They’ll be able to recommend a General Contractor or other professionals if needed, and even help manage your relationships with them if they get out-of-line (which can happen often).
Not all lenders want to handle or manage commercial construction, and it’s something to discuss up-front, right off the bat. If they’re not comfortable with it, or they don’t have much experience doing it, you should keep looking for the right lender.
10) Do Not Choose a Lender Based on Interest Rate Alone
Many borrowers shop for commercial loans based on the lowest interest rate. They boil it down to rate because it’s the lowest common denominator — price. This isn’t the best way to pick a loan or a lender.
Think about the clothes you wear, the car you drive and the house you live in — did you choose any of these simply because they were the cheapest option? If not, then why would you want to base your commercial financing decisions on the lowest price you can find?
Look past the rate — what other “intangible” qualities do your potential lenders offer? Are they a specialist at what they do? Do they have lots of experience with other clients similar to you? Are they able to make your loan a priority?
Will they provide personalized, fanatical customer service throughout the process? These are the things you should look for in a lender. You certainly don’t want to get ripped-off or taken for a ride . . . but you pay for what you get, and you’re aiming for expertise, knowledge and excellent service.
11) Choose a Lender with National Reach
Purchasing commercial real estate is a complex process — much more so than with residential real estate. You should always work with a lender whose reach extends beyond just your local area.
There are many “moving parts” to the commercial loan process, and you should not put your loan in the hands of a lender who has limited local market experience. Lenders with national reach will have a keen sense of national trends that may affect your commercial financing which a “local guy” may not be aware of. Commercial loans often have unique guidelines that vary from state-to-state or region-to-region. When choosing a commercial lender, you want to do your part to eliminate the possibility of oversights and qualification errors.
Ask yourself this basic question: “Does your lender finance projects anywhere in the U.S.?” If the answer is “NO,” you should seriously reconsider your options and work with a lender who is able to provide the appropriate support, knowledge and service, regardless of geographical location or boundaries.
12) Get Referrals
The best way to find a professional in any field is to get referrals from people you trust. Someone you know may have worked with a commercial lender and can point you in the right direction. Think of the people you know who may have experience with or knowledge of buying commercial property:
o Fellow business owners
Likewise, well-connected experts in the real estate industry can refer you to a good lender. Consider asking the people you interact with when researching commercial property:
o Financial planner
o Real estate broker
o General contractor
Get enough referrals so that you can select your top two or three recommended lenders to interview. The lender that was the perfect fit for a friend or family member may not be the right choice for you, but this is a good place to start your search.
13) Ask the Right Questions
Before you meet with potential lenders, know what information you need to know and what questions you need to ask.
Doing this ahead of time and sticking to your list of questions will help you better evaluate each lender’s respective qualifications, products and specialties. Again, the goal is to determine which lender meets your overall financial needs.
Here are some questions you ought to ask of potential commercial lenders:
“Have you worked with many other small businesses?”
It’s important that you work with a lender that understands businesses like yours. Big-time corporate lenders find it difficult to sympathize with the struggles of an entrepreneur, and they are likely to give preferential treatment to their larger corporate clients.
“What is your experience in my industry or with my type of property?”
Although it’s not necessary that a lender has experience working with other borrowers in your specific industry or who bought similar types of property, it is definitely a plus. A lender who has a track record of working with borrowers like you will be able to anticipate the questions and concerns you’ll have during the loan process.
“What is the timeframe for this loan process?”
Each lender may have a different timeframe for processing your Pre-Approval and loan application. You don’t want to deal with a lender who won’t make your loan a priority. You should make your expectations clear up front, and come to an understanding with your lender as to what is a reasonable timeframe for your loan.
“What is the typical Loan-to-Value (LTV)?”
Loan-to-value is a calculation that divides the loan amount by the appraised value of the property you want to buy.
For example, let’s say the property you’re considering costs $500,000 and you are putting down $100,000. Your LTV ratio would be 80% ($400,000 is the amount to be financed, which is 80% of $500,000).
Typically, a lower LTV (higher equity injection) will enable you to get a lower interest rate. For example, many banks will require as much as 25-30% down. This lessens their risk and makes them more comfortable with giving you a competitive interest rate.
NOTE: Some loan programs (such as the SBA 504 loan) deal with Loan-to-Cost (LTC) rather than LTV. This means that the lender is financing a portion of the total project cost (construction/acquisition, tenant improvements, equipment, soft costs, and closing costs) as opposed to the appraised value of the property. This is extremely beneficial to you as a borrower because your out-of-pocket costs go down dramatically. Again, your capital will be better used elsewhere in your company — not tied up in your commercial property.
“Is this loan assumable?”
If one day you think you might sell your property, an assumable loan will let you transfer the remainder of the commercial loan balance to the new owner. You always want to have an exit-strategy, and this is a great selling point down the road, if you decide to sell your property.
“Are there any financial covenants?”
Beware of lenders that want to include financial covenants in your loan. This means they deem you pretty risky, and they want to be able to check up on you to make sure you’re able to pay back your loan. It basically amounts to lender micromanagement. Avoid these if at all possible.
“Do your loans have balloon payments?”
Some lenders will give you a good deal on your loan, but include a balloon payment. This means that you may enjoy very low monthly payments for 5 years or so, but after a set amount of time you’ll be hit with a rather large lump-sum payment. Loans can be attractive from far away. Balloon payments are often so large that business owners must refinance the debt with another lender, which means more closing costs and fees.
“What do you need to Pre-Approve me?”
Getting a Pre-Approval should be easy and shouldn’t involve a mountain of paperwork. As discussed previously, you’ll need to submit some basic documentation, but this process shouldn’t take more than 2 or 3 days to complete.
“What loan products do you specialize in?”
The answer to this question should not be, “Oh, we offer 145 loan options!” You want a lender who specializes in the best products available. That way, they’ll know each product inside-and-out, and will be able to easily recommend which one is right for you.
“Can I talk to your past clients?”
The best people to ask about a lender are the people they have worked with in the past. Try to pinpoint clients that were similar to your situation in some way (industry, type of property, etc.). That way, you’ll get a good idea of what you can expect your experience to be. When you talk to the clients, here are some good questions to ask:
o Were you treated fairly?
o Was the lender helpful with the application and paperwork?
o Was the loan process completed in a reasonable timeframe?
o Would you work with the lender again?
Again, you want your commercial lender to essentially “partner” with you to complete the loan process. You ought to feel like you are in good, capable hands throughout the process. Asking good questions on the front-end will make sure you get the best treatment and experience from your chosen lender.
14) Take Advantage of Other Free Resources
There is plenty of information in the internet about commercial lending that will help you in your decision-making process. Set aside some time and educate yourself about lenders and types of loans that are available to you. Here are a few websites that will provide helpful information about the commercial real estate financing process:
Small Business Administration
Go directly to the source of small business loans on this government website. It covers the basics of commercial financing, a cost estimate calculator, and detailed information on all the loans the SBA backs, including the 504 loan.
AllBusiness.com is an excellent source of information for entrepreneurs. It has articles about buying commercial property, as well as guides to financing the property with a commercial loan.
This is a great place to get information on specific commercial lenders. You can search by state and find out the services each lender provides, saving you a phone call or office visit!
This free legal advice website covers buying a commercial property, but also covers what your loan contract should contain. You can also post a question if yours isn’t answered on the site.
Don’t underestimate the power of a simple Google search. If you read something you don’t understand, Google the terms that are confusing and see what answers you get. This search engine will also tell you if a lender knows their stuff — you ought to see articles, websites, news reports, etc. that illustrate a lender’s expertise.
15) Follow Your New Commercial Lender Checklist
Now that you know 14 Secrets to Choosing a Commercial Lender, #15 is to actually USE this information. Keep this report handy as you evaluate potential lenders, and even as you complete the financing process. You want to know that you’re being treated fairly properly throughout the experience. Here’s a recap of the Secrets that you can use to make notes on as you get the information you need:
You Have Options
Have I evaluated all of my options for commercial real estate financing?
Choose the Best Loan for Your Business
What loan(s) will best suit the short-term and long-term goals of my business?
Get Pre-Approved As Soon As Possible
How soon can this happen and is the lender willing to stand behind his Pre-Approval?
Work With a Specialist Rather Than a Generalist
Will my potential lender(s) provide the best service for my needs?
Work With a Lender Focused On Your Immediate Needs
Are my potential lender(s) trying to get me to transfer my other accounts (deposits, savings, checking, etc.)?
It’s Smarter to Make a Smaller Down Payment
Where should I be investing in my business? Will I be able to invest it properly with this loan?
The Longer the Amortization, the Better
What are my amortization options? What’s the maximum amortization available?