When you’re ready to move forward on a commercial project, whether it’s apartments, retail property, office space or another commercial building, finding a lender who is willing to help you make that dream come true is a project in itself.
After all, banks are looking to finance projects that will give them a reasonable return, and, more than ever before, they’re interested in knowing and understanding your business vision and your plan for success. So before you step into the office to discuss financing with a lender for your commercial project, here are the five things you should do.
#1 Have a copy your business plan ready to go. Nearly all commercial lenders will require you to present your written business plan. At the very least, this should include a summary of your company, an overview of the products or services you will offer, a breakdown of your market, a snapshot of your team and financial information. In addition, these days, lenders are also looking for a marketing plan to be included in that business plan. Your marketing strategy should demonstrate that you recognize the myriad risks ahead and have conceptualized how you will manage them.
#2 Review your credit history. Before you apply for a commercial loan, you’ll want to review a credit report on your business as well as your personal credit report. Conventional lenders, in general, will be looking for a minimum of about five trade experiences on your business credit report before they’ll consider you worthy of a loan. If you haven’t established a business credit history, you may want to make some trade credit purchases to build up a history. And of course, if you see any inaccuracies or issues on your business or personal credit report, you’ll want to get those rectified before you chat with a lender.
#3 Have proof of your business cash flow history as well as business projections. Want to wow your lender? Come to the table with a well-documented flow of cash that demonstrates you’re able to easily pay for the principal and interest on your loan. Be prepared to show balance sheets, cash flow statements, income statements and tax returns for approximately the past three years. If you’re seeking a commercial construction loan without a business track record, the lender may have to make a determination based on a real estate pro forma. A bit like a business plan, the real estate pro forma is a projection of the income the business is expected to make.
#4 Consider your existing collateral and cash. Most lenders, particularly if they haven’t done business with you before, will want some collateral to secure their loan with you. Your collateral could be existing properties you own such as your home or perhaps machinery, inventory or other assets. It’s the lender’s assurance that you are in the business for the long haul because your assets are on the line. More, commercial construction lenders often want developers to cover a set percentage of the total project cost, historically, 20 percent.
#5 Know your character. Lenders aren’t just interested in your ledgers; they’re interested in your character. So, take stock of who you are. Can you show you’ve run several businesses successfully? Do you have a proven professional track record of managing properties for yourself or others? Develop a narrative of your track record and relevant experience in commercial real estate. More, take care in disclosing activities that demonstrate questionable character. In “What Do Bankers Look For In a Business Loan Application,“ one lender explained how his understanding of a borrower’s character changed when they disclosed they underreport income and overstate expenses on their tax returns. Demonstrate integrity, and a lender is sure to recognize that.
Getting a loan for your commercial project is no small undertaking; but by employing these five tips before you meet with a lender, you can make sure you are better prepared for the conversations ahead.