So you say that you’re about to fulfill a lifelong dream of owning your own business. Being your own boss. Before you get the gears in motion, first… stop and catch your breath, then compile a list of items to ask the mortgage broker who will, hopefully, be able to bring those dreams to fruition. Your best bet for choosing a mortgage broker is to locate someone who is both trustworthy and an expert in commercial real estate financing. Let your lender be a friend and help guide you through this process.
Before you grab a pencil and paper to write your list of questions to ask the lender, there are a few questions you need to address about yourself first:
Question: Are you and your business credit worthy?
It is important that you have your finger on the pulse of your very own personal and business credit ratings as they will indeed be analyzed.
Question: What kind of money do you require?
You need to differentiate how the loan will be used, i.e. will it be short, intermediate or long-term or equity capital?
Question: How much money do you need?
You should be able to pinpoint exactly what money is needed at the present time and then delineate exactly what the money will be used for.
Question: Do you have sufficient collateral?
Important! Your collateral must equal the loan amount at a minimum.
Question: What types of limitations will be set by you?
You should know your personal comfort level as to rate, payment, and term.
After you’ve had an honest “conversation” with yourself as set forth above, now, you are able to hit the ground runnin’ when you consult with the financial institution who will assist you in achieving the commercial loan for your new business.
Due to the wealth of information on the internet, you can familiarize yourself with the lending institution and review their policies and procedures before you even commit to a sit-down meeting. Even though you have perused the mortgage broker’s website, there are always additional borrowing options available to you that were not outlined in the general site info. Take your time! Try to understand all aspects of the lender’s mortgage program so that you are well-informed and less intimidated by the facts and figures that will crop up during the meeting. Be a borrower who is armed with his/her own questions, like the ones set forth below.
First ask yourself what money is needed up front and in the future – this will determine the interest rate in order to maximize the amount of money they can borrow. The typical commercial lender will loan approximately 75-80% of the property value, thus requiring the borrower to come up with a 20 to 25% down payment. You might wish to inquire of the lender whether their mortgage program permits you to take out a second mortgage, either at the time of closing or at a time in the future. By choosing a lender that permits second liens, it will add flexibility in meeting your future capital needs. You will additionally be allowed to capitalize on your property appreciation without a costly refinance.
Many commercial mortgages include a balloon payment. While this is a useful concept for a residential borrower, most commercial mortgages have a balloon payment which is typically due in 3 to 10 years. Consequently, a balloon loan will likely cause you to have to refinance the loan before the balloon date meaning the risk of spending thousands of dollars in closing costs, and risking a higher-cost loan if interest rates have risen. Thus, you are better off with a mortgage program which does not require a balloon payment.
Depending on how quickly you need to achieve pre-qualification for financing and finalize the loan, especially if you have property in mind, do be sure to get a time frame on a finalize date from the lender. It is not as easy as a residential mortgage because commercial mortgage lenders must also examine your historical income statements, asset statements and additional documentation before approving you for the loan. It could take weeks from the initial meeting to achieve approval from the lender.
Your commercial loan officer will be able to instruct you on the minimum level of deposits necessary for your qualification for the loan.
As stated above, be sure to locate and be familiar with various financial documents to present to the lender at the time of the initial meeting. Such would include: copies of leases, operating statements, tax returns and asset statements for starters. Your lender may ask for additional documents, but these are the main financial documents needed.
When obtaining a commercial loan, be sure to question what any future obligations will be imposed by the lender beyond making the monthly payment. Some lenders do require you to provide quarterly or semi-annual financial and operating statements on your business or property for as long as you are in your loan. Be certain to ask your lender about reporting requirements and all terms regarding them.
Be sure to confirm whether or not your loan is assumable to your property buyer in the event you decide to sell the property in the relatively near future. Unlike residential mortgages, it is standard practice for commercial lenders to charge pre-payment penalties for early repayment of a loan.
Understanding the up-front costs will help contribute to your understanding of the entire commercial mortgage process, from start to finish, well before the meeting. But, be sure to inquire about any costs associated with the loan that can potentially save you thousands of dollars. Be sure to ask about all costs you will be responsible for, including lender fees and points, reports such as a property survey, environmental reports and/or any legal fees that might be associated with the loan. Some lenders will have less-expensive alternatives, or will bear these costs altogether.
If you feel comfortable with all of the answers to your questions posed above, you are on your way to being a new commercial land or business owner in the near future. Good luck with your new venture!