Gaining an understanding of CRE loans and how to be approved for one is not as daunting as it may seem. Starting off by educating yourself on the terminology associated with commercial real estate loans as well as where to obtain one will be advantageous, especially when it comes time to approach a lender.
Gaining an Understanding
Commercial real estate loans are used solely for business purposes with the goal of producing income. Similar to residential loans, independent lenders and banks are involved. There are multiple other places to obtain commercial real estate loans including pension funds, private investors, and the US Small Business Administration’s 504 Loan program. Taking the time to weigh all the possibilities will ensure you choose the right financing option to meet your needs.
One term to study is prepayment. Unfortunately, it is not uncommon for loans to have restrictions on prepayment. If you settle a debt before the loan is up, you could be hit with various penalties including interest guarantee, prepayment penalty, lockout, or defeasance which is a substitution of collateral. Loan-to-value ratio is also important to become aware of, and this measures the value of a loan against the value of a property. Strive for a low LTV ratio because the lower it is, the more stake you have in your property. Commercial loan LTV ratios often fall between 65% and 80%.
Before Approaching a Lender
One of the most important steps before approaching a lender is to craft a business plan. It will be imperative to take your time on this plan ensuring it is both transparent and organized. This will be a key aspect of the approval process and could be the deciding factor for a lender. Learning how to seek out great deals on CRE loans will also be useful. One aspect of being able to recognize a great deal includes having an exit strategy. Building relationships and being personable will also be useful when it comes time to approach a lender. Developing a friendly relationship will allow them to put more trust in you and increase the likelihood of them offering more money.
With a basic understanding of CRE loans and the terminology associated with them, you can be well on your way to getting approved for a loan. Becoming aware of what commercial real estate loans are used for as well as some key terms is critical. Additionally, developing a business plan prior to approaching a lender is just as important. This should be both organized and transparent to increase your chances of being perceived as reliable and trustworthy.