A commercial mortgage loan is one that is secured by commercial property. The lender will have to verify that the entity seeking the loan is qualified and therefore certain documents will have to be submitted as a part of the application. Those documents include:
• Current leases
• Statements indicating the value of all property owned by the business
• Formation documents
• Previous tax returnsOnce everything has been submitted, the application will be reviewed by an underwriter to determine whether the applicant will get the loan. Among the things considered will be the debts carried by the business entity. The underwriter will have to make sure that the business can afford to make repayments. They will make this decision using a ratio of monthly income to debt payments. The business will have to earn a certain amount of money for every dollar in debt payments.
Loan Obligations
If the lender decides to provide the loan, the borrower should know that they may have to abide by certain covenants and restrictions. They may have to provide the lender with financial statements so that the lender can see that they will be able to continue making repayments. A business owner seeking a commercial mortgage loan should be aware that these loans are considerably different from residential mortgage loans. Here are some of the factors that the borrower should consider:
Repayment
Banks often require a balloon repayment, which means that the borrower will eventually be expected to make repay the whole balance on their loan after a set term. If they are unable to do this, they must re-qualify for the loan or refinance it.
The Amount to Borrow
The borrower should carefully calculate the amount they need as a) a second mortgage may be prohibited, and b) with some types of loans they will be required to come up with a certain percentage as a down payment.
The Time it Takes to Get the Loan
This depends on the lender. It may take weeks for a bank to commit to a loan, and even after it does its credit committee may still veto the loan. Borrowers should note that if they do not have a good credit score, it is probably best to skip applying for bank loans and seek the money from a commercial lender instead. Commercial lenders typically have less stringent requirements and fewer loan covenants.
The lack of sufficient capital is one of the leading reasons that small businesses fail. A commercial mortgage loan can provide a business with enough capital to meet its needs; however, it is important that borrowers educate themselves on what to expect from the application process.