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South Dakota Commercial Loans

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Securing a commercial loan in South Dakota

A commercial loan in South Dakota can help you fund the growth, expansion, or startup of your business, if you need real estate.  Most businesses do.  Location is extremely important.

Commercial Real Estate Loan Types

There are many different types of commercial loans. The type depends on the purpose of the property being purchased. A commercial loan could finance a hotel or motel, light industrial building, marina, apartment building, auto services building, bed-and-breakfast, mixed use property, mobile home park, multi-family unit, office, campground or RV park, convenience store, gas station, health care center, retail space, self storage compound, warehouse, or restaurant. Here are some of the most common types:

Traditional Purchase Loan

Purchase loans have fixed or adjustable rates, much like a residential mortgage. Interest rates are contingent on loan-to-value ratio, or LTV, and the property is used as collateral. There is some relative flexibility where credit and income is concerned with traditional commercial purchase loans.

Bridge Loan

Outstanding credit and high, steady income is often required for bridge loans, since they offer immediate capital on the short-term - typically one year - to suit a commercial project's beginnings, often from a private lender. Longer term financing should be pending while these short-term funds are borrowed.

Participating Mortgage

Most used among lasting retailers and stable offices, the participating mortgageholder gives the lender a cut of the business or real estate revenue along with interest and principal payments every month.

Hard Money

Usually offered by private lenders because of their substandard requirements, hard money loans carry unusually high interest rates since they are particularly high risk. The property serves as the collateral for financing.

Commercial Loan Requirements

Credit and NOI

Commercial loans typically have strict credit and debt requirements, although the spectrum is wide thanks to the flexibility many private lenders offer. To have a credit (FICO) score of 700 or higher is ideal, but certainly many commercial loans have been approved for borrowers with credit in the 680 to 700 range. There is hope for borrowers whose credit is even lower, but lenders will look for compensating factors, such as a high net operating income (NOI), which should surpass the monthly mortgage by at least 25%.

Debt Service Coverage

Another factor lenders will examine is borrower debt service coverage, which is a ratio of the yearly net operating income over the mortgage payment. Businesses should have a debt service ratio of over 1.25, as determined by a licensed appraiser's estimates.

Debt Yield Ratio

Lenders will also consider a commercial loan borrower's debt yield ratio, which is their NOI divided by the total mortgage loan. A business with an NOI of $500,000 per year and a prospective loan amount of $7,000,000 will have a debt yield ratio of 0.0714, or 7.14%, meaning even if the property is foreclosed out the gate, the lender will receive a 7.14% return.

South Dakota Commercial Loan Lenders

Commercial lenders, whether for small business, hard money or others can be difficult to find. Lender411 has a number of commercial lenders in its directory. Find one near you by filling out the form at the top of this page. 

The largest cities in South Dakota are Sioux Falls and Rapid City.  These areas have seen significant growth and commercial development.  If you’re planning to start a business in the state, consider these areas first.  Talk to a local lender to explore your financing options.

South Dakota Small Business Loan Resources

The U.S. Small Business Administration, or SBA, offers affordable financing opportunities to help small businesses grow. The South Dakota SBA District Office is located in Sioux Falls. Generally, small business owners can finance their endeavors in two ways: equity or debt financing. 

Equity Financing

Small business owners can receive funds through equity financing without acquiring debt. In exchange for ownership share, another company raises funds for the recipient. The SBA recommends business owners take the equity financing route if their business has a high debt to equity ratio; that is, if they have borrowed for their business more than they have invested. 

Debt Financing 

For the opposite case - a business owner has a high equity to debt ratio - debt financing is a safe option, and recommended by the SBA. Debt financing is the borrowing of money from a lending institution or private lender, to be repaid over time, and usually with interest. The allowable loan amount, length of repayment term, and interest rate will vary depending on the lender. 

Help Through SBA

Your local SBA office may be able to offer aid through the Financial Assistance Program. Eligibility depends on several factors, although special considerations may be made for franchises, farms, medical facilities and more. Here are the basic criteria for eligible companies:

  • Must be for-profit.
  • Must be operating within the United States and territories. 
  • Must have a reasonable owner equity for investment.
  • Must seek other funding sources including personal assets before seeking SBA's help. 

To see if you qualify for special considerations, contact the South Dakota SBA District Office: 605-330-4243.

About South Dakota Business

Historically, South Dakota has been known for its agriculture and rural lifestyle.  Until recently, in order to retain more residents, South Dakota sought to diversify its economy to include the service industry.  Now, the service industry is the largest industry in South Dakota.

This sector includes the retail, finance, and health care industries.  Government spending is also an important factor in South Dakota's economy.  Ellsworth Air Force Base is the second-largest single employer in the state.  One of the largest tourist events in the state is the annual Sturgis Motorcycle Rally.  The three-day event drew over 450,000 attendants in 2006, which is significant considering the state has a population of only 750,000.  If you live in South Dakota and are interested in owning a business property in the state, Lender411 can help you find the best commercial mortgage rates.

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