Think Like A Lender - 5 Key Questions Before Submitting A Commercial Loan Request

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Brad Hettich on Real Estate Revealed – Sunday, October 11, 2020


Transcript of Real Estate Revealed Show on AM560


Sunday, October 11, 2020


Good Morning and as always it is a pleasure being here.


Today I want to encourage anyone looking to buy a commercial property to try and “Think Like a Lender” before submitting their request.  There are five key questions I think you need to ask yourself before submitting a request to a commercial lender to best position your loan request for approval.


As I have discussed on past shows, unlike residential lending, commercial lenders do not all follow the same set of rules.  Although the basic lending and regulatory requirements for Commercial Banks are the same, commercial lenders make decisions individually on each file and there is a lot of flexibility between lenders on what you can get done.  That is why it is always important to put your loan request in the best position to get an approval.


Question 1 – Do I have sufficient collateral to secure your loan?  Typically, Bank’s do not want to advance more than 75% of the value of real estate collateral and 75 to 80% on accounts receivable, and even less on other collateral such as equipment, inventory, etc. If the amount of the loan request you are asking for will exceed the collateral value you have after using a bank advance rate against that type of collateral, then you need to consider if there is a way to provide additional collateral.  This can come in the form of outside real estate, equity in a home, marketable securities, etc.  Or the other option is to reduce the amount of your request.  There are only a few loan types like SBA 7A loans or SBA 504 loans where you can get away with 90% advances or even higher on SBA 7A loans for your loan.  If you do not have enough collateral you may want to consider one of these loan types.


Question 2 – Does my property or business produce sufficient cash flow to support the loan payments on the loan I am requesting?  Lender’s typically want to hit what is referred to as a 1.25x debt service coverage ratio, which means your business or property cash flow is 125% of your required loan payment after all property or business expenses.  If you do not have enough cash flow currently, you will want to prove how you can have enough cash flow in the future or find ways to enhance your cash flow via one-time expense add-backs.  Maybe you made a bunch of repairs on the building.  If you are prepared in advance to show your lender you did that and to provide they are one-time, they can get that added back to cash flow.  Don’t expect the lender to seek ways for you to hit the cash flow required.  You need to do that.


Question 3 – How is my credit?  I recommend checking your credit score.  If your credit is bad, try to fix it in advance or at least get explanations for why it is bad.  There are many credit repair specialists out there that could help you repair your credit.  A potential customer called me the other day looking to refinance their commercial property.  However, in reviewing their credit I found that they were in the middle of a loan modification on their home mortgage.  It is going to be hard to convince a lender to refinance their commercial property when they are currently struggling to pay their home mortgage.  Keeping your credit clean is important.


Question 4 – Do I have the experience for what I am asking for?  I had a call the other day from a client wanting to buy a property and open up a restaurant.  The client runs a day care now, but has never run a restaurant.  It is going to be a hard sell to a lender.  However, if she partnered with an experienced restaurant operator, it becomes a much easier sell.  We are doing a restaurant purchase right now where the primary buyer is partnering with the existing General Manager, and even though the main partner does not have any experience in the restaurant industry, because of the General Manager’s experience the issue of experience is not even a question.  We recommend always taking the time to build up your resume or your team to show you have the experience for what you are looking to do.


Fifth Question – What are the really big positives about what I am looking to do?  You want to be sure to notate all of the positive reasons a Bank should lend you the money and be ready to discuss those. Again, lenders are not going to look for the reasons on their own.  You need to tell them what gets you excited about your business and why they should be excited.


I know I said five questions – but one last question you should ask yourself is – If someone came to you asking you to lend them the money for what you are doing, would you do so?   If not, then you know you probably have some issues with what you are looking for.


If you ever want to jump on a call and discuss how to position your loan request, please let me know.  We spend a substantial amount of time helping all of our customers answer these questions and others every day to position their request for the best chance of approval.