Commercial Real Estate Loan Eligibility

If you want to secure a commercial loan to purchase real estate, you'll have to convince your lender that you're a worthwhile credit risk.  This is true whether you need property for business or investment purposes.

Commercial real estate is a very competitive marketplace.  Read through our checklist of factors your lender will consider when deciding whether or not your request for funds is convincing, and adjust your application accordingly to improve your chances of success.

Personal Finances

Many entrepreneurs who take out commercial property loans do so in their names at first.  At a later date, this debt may be transferred to the business entity.  If you're one of these startup entrepreneurs and you're planning to take out a commercial loan, you'll need to show that you have sufficient personal income to cover the payments, as your business is likely not operating on a cash flow basis yet.

Credit Score

If you are borrowing the money in your name, your personal credit score will play a major role in deciding whether or not you receive financing.  If you're purchasing the property through a business entity, your lender will analyze the credit score of this entity to make the decision.  If your business is fewer three years old, however, the lender will also check your credit score and the scores of any other principal or managing owners.

Projected Operating Income

Projected Operation Income is the most important factor your lender will look at when analyzing your loan request.  You are asking your lender to go into business with you as a strategic partner, and before your lender agrees to this, the bank will need to conduct a thorough inquiry into your financial situation and earning potential.  Your lender will ask, "Is your company worth partnering with?"  If you are unable to convince your lender of strong earning potential, you'll have to look elsewhere for financing.

The debt coverage ratio or DCR is a common ratio lenders analyze when determining the income potential of a property.  The ratio determines whether the expected monthly net income a property will produce is equal to, less than, or greater than the amount of debt you plan to take on to purchase the property.  The ratio will dramatically impact your ability to get a loan.

Type of Commercial Property

Different property types come with the various amounts of inherent risk.  Office buildings are often considered the best type of property to finance because they carry minimal inherent risk.  Lenders will provide better financing arrangements for office complexes than for some other property types.  Churches and gas stations, for example, are often unattractive to lenders because of the amount of red tape buyers must wade through before turning a profit.  Potential environmental issues may also give lenders cause for concern.  In short, the type of property you need to finance is a major factor that will affect your commercial loan success.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.