Commercial Loans Explained By A Top Lender: Types of Loans, Eligibility/Requirements & Today’s Rates

Commercial Loans Explained by a Top Lender:
Types of Loans, Eligibility / Requirements & Today's Interest Rates

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Commercial Lending can be complicated… There are many different types of loans, in addition to many requirements and factors commercial lenders take into effect to determine eligibility for commercial loans. 

So, we asked one of our preferred lenders, Vice President of Commercial Banking Leonard Henderson with b1 Bank, to give us the inside scoop and break it down for us.

And here is what we found out…

TYPES OF COMMERCIAL LOANS

Types of commercial loans offered by b1 Bank particularly (and many other commercial lenders) include Real Estate and Construction Loans, Mergers and Acquisitions Loans, as well as SBA Lending. 

In addition, many lenders including b1 Bank will offer equipment financing, working capital loans and business credit cards that are backed by MasterCard. 

Let’s briefly go through each of these loan types before we talk more about requirements, eligibility and rates.

REAL ESTATE & CONSTRUCTION LOANS

A commercial real estate loan is a type of mortgage loan used to purchase, refinance, or to renovate a commercial property. These types of loans are utilized to finance properties for business purposes. Often, they are made to corporations, developers and even an individual at times. 

The main difference between a commercial loan and a mortgage loan for personal real estate is that the loan is secured by a lien against a commercial property instead of a residential one. 

Interest rates on commercial loans are typically higher than those on residential loans, generally by about 1 percent. More about interest rates will be discussed below.

A construction loan is used to help you fund a new construction project. Whether this is for multi-family, an apartment building, high-rise, commercial office building, warehouse, flex space or another type of project, you will typically work with your lender to create a “draw schedule” based on project milestones.

Often, lenders will require certain completions and inspections before releasing the next “draw.” Additionally, when you take out a construction loan, you will usually just pay on the interest of what has been received to date.

When securing a construction loan, you can expect the lender to require many items from you, the borrower. These may include building plans, General Contractor bids, timelines, etc. Below, we will discuss what eligibility and requirements the lender will also take into consideration to approve this loan.

However, once the construction project is completed and the full amount of the loan is due, you can look into securing a commercial mortgage – the property can serve as collateral for the mortgage and the mortgage loan can be used to pay off the commercial construction loan.  

MERGERS & ACQUISITIONS LOANS

These types of loans are generally used by business owners to buy out their partners, to bridge short-term requirements, to help companies grow or for businesses working on expansion.

These loans are sometimes used when the collateral for the loan will be the property or asset being acquired. Since these types of purchases typically cannot be made utilizing the company’s regular cash flow, businesses will use a merger and acquisition loan when they are potentially growing fast or engaging in mergers and acquisitions.

They’re also sometimes used by companies that utilize large and expensive equipment, like construction companies.

Acquisition loans can help businesses to acquire vital assets (even including another company) that can help them grow their income and businesses over the long-term.

 

SBA LENDING

Loans guaranteed by SBA may be small or large and can be used for many business purposes, including long-term fixed assets and operating capital. 

Some loan programs set restrictions on how you can use the funds, so check with the lender when requesting the loan.

This type of loan generally has competitive terms – rates and fees comparable to non-guaranteed loans, come with counseling and education that provides support to help you start and run your business, and also may have lower down payment, more flexible overhead requirements and no collateral needed for some loans, according to sba.gov. 

These types of loans come with certain requirements, such as what a “business does to receive its income, the character of its ownership, and where the business operates.”

Contact your lender or learn more about types of SBA Loans here.

WORKING CAPITAL, EQUIPMENT FINANCING & BUSINESS CREDIT CARDS

M&D Real Estate’s Preferred Lender b1 Bank, in addition to many lenders, also offer these types of financing and loans that can help business owners:

  • Working Capital Loans are typically a type of short-term financing used to cover day-to-day business expenses, such as rent, payroll, utilities, or inventory purchases.
  • Equipment Financing Loans are utilized to purchase business-related equipment. This may be a vehicle, restaurant equipment or even a large printer. These loans usually require periodic payment that include interest and principal over a fixed term.
  • Using a Business Credit Card can offer many benefits, such as increasing Your Business Credit Rating, help keep your business and personal finances separate, help you gain access to better financing and terms, as well as improve your business’ cash flow.

LENDING REQUIREMENTS FOR COMMERCIAL LOANS

M&D Real Estate’s Preferred Lender b1 Bank, in addition to many lenders, also offer these types of financing and loans that can help business owners:

  • Credit Rating of 640+
  • Global Debt Service Ratio Greater than 1.25x – This means if you hope to secure a $1 million dollar loan, then you would be required to provide that your net operating income is at least $1.25 Million Dollars.
  • Personal Guarantees – Often, lenders will want someone personally who can guarantee the loan, even if it is for a business entity.
  • Post Close Liquidity – This means the lender is not only looking for how much you are able to put down, but whether you then have enough financing moving forward to continue your business, pay your loan payments, etc. Ideally, of course, your cash on hand should not be completely eaten up by your down payment.
  • Collateral with a Maximum Loan-to-Value of 80% – This is the hard cap on the amount of money a lender is willing to offer a borrower with a secured loan. These apply when you take out secured loans with assets acting as collateral. In this instance, the borrower would need to put at least 20 percent down and the 80% is the amount that the lender is willing to finance of the property’s value.
Post Close Liquidity Means Commercial Lenders Want You to Show Your Income After Down Payment

DETERMINING ELIGIBILITY FOR COMMERCIAL LOANS

Lenders look at many factors and they all carry different weights and can affect the lending process and ultimately approval and terms of the loans. 

The following are some of the main considerations:

  • Credit HistoryDoes the individual or business have good credit and payment history?
  • Guarantor’s ExperienceDoes the personal guarantor for the loan have experience in the particular type of business they are involved in securing the loan for? For instance, if I wanted to start a concrete company and get a loan for this, I would need to prove I have some experience in this business in order to secure the loan. Also, what is the guarantor’s past credit/ loan experience?
  • Adequate Cash Flow from The Operation and/or Guarantor The lender will look at whether the business or individuals’ regular cash flow is enough to make the loan payment.
  • Does the Credit Request Fit the Client’s Needs or Can we Provide a Better Option Our preferred lender, as a professional, will ensure the client is applying for the correct type of loan that will be most beneficial for the borrower/borrower’s business.
  • Is the Collateral Quality, Readily Marketable and Within Policy? Lenders will evaluate whether collateral for the loan is actually something that is of quality, in demand and ultimately, that they could easily sell and recover their money in the event you defaulted on the loan.

TODAY'S INTEREST RATES ON COMMERCIAL LOANS

When we asked Vice President Leonard Henderson what they are seeing in rates right now, here was the response provided as of October 2022:

“With WSJ Prime increasing several times this year, our commercial loan rates are carefully decided based on the credit request and other factors; it is not a one-rate-fits-all approach. We also put our clients in the driver seat with the option of having a floating rate or fixed rate on their credit request.”

TYPES OF PROPERTIES LENDER MOST APT TO LEND ON IN COMMERCIAL REAL ESTATE

According to Vice President Leonard Henderson, b1 Bank is apt to loan on most types of properties, including, but not limited to, commercial, multi-family and single-family. 

They view an acceptable Loan-to-Cost and/or Loan-to-Value as a determining factor:

Loan-to-Cost (LTC) is a measurement in commercial real estate that looks at the ratio between the total loan amount and total cost of the project. It means dividing the loan amount by the construction cost to compare the financing amount with the cost of a property. For instance, if the cost to complete a construction project is $1 million and the loan amount is $700,000, then the loan to cost ratio would be 70 percent.

On Loan-to Value (LTV), as discussed above, our lender typically requires 80 percent. The (LTV) equals the amount of the commercial mortgage divided by the market value of the property as determined by a commercial appraisal. Typically, Loan-To-Value Ratios for commercial real estate loans are capped at 75 to 80 percent in most instances.

Questions on a Commercial Property or the Commercial Lending Process? 

Contact one of our M&D Commercial Agents today who can advise you further on the process related to your specific situation, explain what to expect, and the next steps to take… 

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