Utilizing a commercial loan for your business can be an intimidating process, one that can seem inaccessible and overwhelming. The process of receiving a commercial loan is one that requires a company to have its financial house in order, but it can be a valuable and useful tool to utilize for a small business looking to fund its growth prospects. A commercial loan can be used to expand a business’s operations and improve the delivery of services, allowing a company to grow as needed. If you or your business are interested in receiving a commercial loan, here are a few things you need to be aware of.
Loan to Value Ratio
The loan to value ratio is something measures the value of the loan versus the value of the property or asset. This is used to determine how much a loan can be given out by the lender to the entity that is receiving the loan. Typically, the total amount of money that can be loaned at to a commercial entity is capped at 75-80% of the value of the property. This means that a company is restricted from borrowing too much in order to purchase a property or asset, and must put down a significant down payment in order to receive a commercial loan.
The more a company is able to afford to put down, the better the terms of their commercial loan, as a lender will be more likely to give a beneficial loan. In recent years, there have been a development in this sector called a non-conforming commercial loan. This type of loan allows a commercial entity to borrow at a loan to value ratio of up to 90%.
Who Is Eligible for a Commercial Loan
An important aspect to be aware of is which entities are able to receive a commercial loan. Although there are instances where an individual is able to receive a commercial loan, the most likely scenario is one where a commercial loan is given to a corporation or some type of commercial entity. This can include a limited liability corporation (LLC), an S Corporation, as well as a trust or fund.
In addition to being a legally recognized commercial entity, an organization or individual must show that they have a strong financial history. This includes a good credit score as well as no serious amount of outstanding debt, which can limit a commercial entity’s ability to receive a loan from a respected financial institution. If a commercial entity attempts to receive funding with poor credit, its chances of receiving funding will be severely limited and if a loan is acquired then the terms will not be favorable to the lendee.
If a commercial entity or company does not have a thorough and extensive enough of a financial history to present to a financial institution, it can acquire a commercial loan by putting up the necessary collateral as a way to guarantee the loan. Individuals have put up their homes or other valuable assets as a means to acquire a loan. While this is not the desirable situation for a company to be in, it does provide an option for those entities that do not have a long financial history.
Financial Institutions Constantly Change Their Requirements
It is important to understand that the terms offered by a bank one month may not be the same a few months later. This is because a bank’s financial portfolio is always evolving and factors outside of the relationship with an individual entity can affect the terms of a loan. If a bank takes on too much financial liabilities and its portfolio is affected by various economic factors, it can create a scenario where a commercial loan can become easier or more difficult to attain.
A company’s portfolio can impact the overall terms that it sets with companies that are seeking a commercial loan. Loan to value ratios can shift, either in the positive or negative direction. If you are turned down for a loan by a financial institution, it may be a good idea to check back in with them a month or two later, as their LVR rates may have shifted to become more beneficial to an entity seeking a loan.
Your Company’s Cash Flow
If you are seeking a commercial loan from a trusted financial institution, you will want to be able to show that your company or business has a steady cash flow. Being able to show significant and consistent cash flow to your lender will greatly improve your chances of being approved for a loan. It will also help in regards to the terms of a loan that you receive.
It is important to have the ability to show a maximum cash flow to a lender, as they will want to see at least 1.2 times the cash flow versus the amount of debt you have. This is so you have some leeway in regards to paying off your debt. If your expenses are too close to the amount of debt you have, a financial institution will be much less likely to provide you with the necessary funding, as there will be dramatically less room for error. It is important to have your finances in order and realize how much cash flow you have coming in prior to meeting with a lender, as your chances will be much greater with a healthy stream of money coming in.
Come see the experts at COHI Capital Private Equity Lending. We are happy to help you assess your needs and create a beneficial plan immediately. We will help you decide what type of loan will work best for you, as we have fulfilled successful funding needs for over a decade. If you would like a full detailed review of your situation, this can be completed in addition to any other resolution or monetary needs that you require. Request additional information by contacting COHI today. Call 970-922-3277 or contact us for a decision. Often these are made the same day and can be addressed depending on client needs and schedule.