When it comes to buying commercial real estate, financing is one of the most important parts of the process. Whether you're interested in buying property to rent out or to use for your own business, it's necessary to acquire financing unless you can afford the entire building purchase. Of course, most people, even those with excellent resources, are not able to pay for commercial property out of their pocket.
Commercial real estate lending is a competitive business and the lenders want to be certain they are offering money to the right buyers. When you attempt to get the attention of the lender, you should have the necessary documentation ready as they require it, demonstrating to them that you are a person who is interested and is not playing around. As with home loans, you may also want to look into several types of appropriate loans.
The following things are all going to be necessary in some form when attempting to find a lender for commercial real estate.
- A reasonable down payment - Very rarely will a person be able to receive a commercial real estate loan without the proper down payment. For this reason alone, you should plan and have the required funds available to you at the time of the application process. In most cases, you will be required to put at least 10% and possibly up to 30% of the loan price as the down payment.
- Excellent Credit - Commercial real estate loans usually cost a considerable amount more than the average home loan. If your credit is poor, a lender is going to be more hesitant to approve your loan no matter how much experience you have in the area of your endeavor. You need a solid credit history that is void of bankruptcy and late payments. If you have bad credit, try to have that straightened out prior to applying for a commercial real estate loan. You can find out your FICO score from your lender. If you want to find out what your FICO score is before attempting to purchase commercial real estate, you can pay to have one of the four credit companies (TransUnion, Equifax, Experian or Innovis) tell you your score. Your score should be over 700 to be considered excellent.
- Some notable experience in your new business - Lenders realize that offering people money for commercial real estate can be a risky thing to do. If you are attempting to get a commercial real estate loan to run a restaurant, but have never even worked in a restaurant, this is going to make a lender nervous. Why would you assume that you are able to work in such a competitive business when people with experience have failed in the past? The same can be said about commercial real estate sales and other areas. If you do not have experience in the area where you plan to work, you may not get the loan because of fear of potential failure in the business you wish to run.
- Have proper business plans - If you want to impress your potential lender you need to show them that no matter how much experience you have, you do understand how to make money and how to make a business succeed. A business plan can show the lender that you understand where you want to go with your business and are ready for the possibilities of what could happen. A small business plan will inform them of the type of business you want, how you plan to run it, the area and demographics that will lead the profits, and how you are going to bring everything together.
- The ability to be in the clear - If you are buying a business rather than a building, you need to be able to show that there is going to be proof of positive cash flow. If this is going to be your primary business and it is falling behind and coming up negative, then you will not have money to live on. If you are not going to have money to live, you probably will not be able to pay your loan either. No lender in their right mind is going to give a loan if they think you will not be paying them down the road, as planned.
- Company history - If you are buying an established business, how much of the business is going to change? If the old owner simply wanted to retire and sell the business, but nothing else is changing other than the owner, you may have a good chance at a new business. If there will be employees staying who have been with the business for a considerable amount of time and know how the business is run, that will look good for you and your chances of getting a commercial real estate loan. However, if you plan to buy an established business and start from scratch, you will be a harder sell.
- Proper training - If you are not familiar with your business in terms of experience, you may be able to negotiate a loan if you write a training period into your purchase agreement. Rather than just being given the new business, the old owner would devise a training program to teach you all that you need to know about the company. This might last for a few months or maybe even a year, but the training time may ensure you get the loan and it will better serve you once the business is entirely in your hands.
- Seller loyalty - Lenders want to know that you are choosing the right business for you and for them. Is the seller you are working with prepared to take the business back if you are unsuccessful in your attempt? If they are willing to take back the loan, then this shows confidence that they are offering you something high quality and worth selling.
- Total income situation - Do you, or will you, have other income once the business loan goes through and you start your new business? People that have income aside from the new business will appear more attractive to lenders than those who do not have extra income. Extra income means there is a better chance you will pay those loans for business off faster, regardless of whether the business has a bad month. Lenders want to know that, despite what happens, their loan will be paid and on time.
Commercial real estate loans can take anywhere from 30 to 60 days to be processed. The amount of time will largely depend on your ability to prepare the necessary documents and provide them to the lender. The faster you have these documents, the faster your loan will go through and the business will become yours.