Traditionally, commercial loan requests were validated based on commercial lender’s or financial institute’s internal credit policies and merits. The commercial lenders would take a look at the borrower’s portfolio to determine whether to grant the loan amount or not. However, commercial property lending has been streamlined with many other funding options available for commercial real estate loans. The commercial loan underwriter would examine the following before accepting your loan request:
1. Cash Flow Analysis (DSCR)
When underwriting a commercial loan request, the most crucial component is the analysis of the subject property’s cash flow. The property must have enough cash flow to cover all the added expenses along with regular loan payment. The commercial lenders calculate the cash flow for a commercial real estate loan to ensure that the property has the potential to support the commercial mortgage payment along with other expenses.
2. Credit Worthiness
A commercial loan is given to business owners for their commercial property, personal credit of principals have to be evaluated. The guarantors must have good credit to provide documentation of income. They need to provide tax returns or personal financial statements for the stated commercial loan requests.
3. Property Analysis
Property age, appearance, local market, location, and accessibility are some of the major factors that are considered while the commercial loan underwriter analyzes the market value and market rent of the property.
4. Collateral
Collateral is an additional form of security that assures the lender and the underwriter that you have an alternative source of loan repayment. This implies that other property or assets can make up for the value of the loan amount if you default. Collateral acts as a safety net for the lender if you can’t pay back the loan. Hence for default case scenarios, your loan underwriter will have a close look at the collateral to determine how much your collateral is worth.
Property such as home or land is the most common type of collateral. However, other forms of collateral can be inventory, cash savings or deposits, and equipment. The value of the collateral depends on the amount of loan demanded from the lender.
Note: The borrower can alternatively also go for asset-based finance factoring where generally your accounts receivables and inventory are used as collateral to access the money at that moment.
5. Credit
The commercial loan underwriter would want to have a look at how you have treated your past debts which in turn will determine how you will handle it in the future. The underwriter may also demand past bank statements and look at the credit score to analyze your payment pattern and other financial histories. All this is done to see if you repaid that debt in a timely manner. Hence it is crucial to keep your credit history clean before approaching a lender. Some underwriting systems have their set credit score and you need to meet it to get your loan request approved.
To complete the loan process smoothly, have all the required documents ready in advance and get your loan sanctioned effortlessly!