Most of the time, you need a significant down payment to start building a new house, growing your business, or dealing in real estate. You can quickly get a loan from a moneylender in several simple ways. That is the most critical question. The key is to become proficient in the “commercial loan application” process.
For over 30 years, CommercialConstructionLoans.Net has been a table lender and partner lender for commercial loans. We have extensive knowledge on how to help people manage their finances and real estate. We’re proud to connect our clients with more than 200 private investors and lenders. It’s now more likely that you will be approved for a loan.
To simplify the process of applying for a commercial loan, this blog post outlines the eight key factors lenders typically consider when reviewing loan applications. If you know these essential things, you’ll have a much better chance of getting the money you need for your next job, whether it’s building something or something else.
The Foundation: Your Business & Project Overview
1. A Solid Business Plan (and Why it Matters)
Ensure your business plan is well-written and well-organized to increase your chances of securing a commercial loan. Your story is very well-written, which suggests you have high hopes for the future, a good business idea, and a lot of knowledge about the real estate market. Lenders will carefully review this paper to assess your readiness and commitment.
This part of your business plan should have the main idea. It should provide a concise outline of your project and its objectives. To demonstrate your understanding of your business, target audience, and competitors, a thorough market analysis is necessary. You need to create detailed plans for your finances that outline how much you will earn, spend, and then save over a reasonable period. Ultimately, discussing the experience and understanding of your management team instills confidence in the success of your plan.
There’s more to a good business plan than just writing down. It also demonstrates that you have a strong track record and extensive knowledge of the real estate industry. Here’s where you can talk about your past successes and show that you can do well in similar jobs. It helps your application if you have kept promises before.
Lastly, a well-written business plan demonstrates that you have thoroughly considered the project and are clear about its objectives. Not only is it the right thing to do, but it also indicates to potential lenders that you are a responsible and professional individual. Obtaining a construction loan can be challenging without this crucial document.
2. Project Details: From Ground-Up Construction to Renovation
Any lender who gives you money will want to know what kind of construction project you’re undertaking and whether it can be completed. Every detail is essential, whether you’re starting from scratch, rebuilding, restoring, fixing up, or selling. You need to be very clear about what you want to build or change with lenders.
Create a detailed list of all the expenses you anticipate the job will incur. This includes purchasing land, paying for supplies, compensating workers, and setting aside funds for unexpected costs. Additionally, times are crucial because they document every step of the job, from start to finish. A well-organized routine demonstrates that you have given everything careful consideration and created a solid plan.
Essential parts of the project to go into more detail about:
- Buying property: Details about the land or building that is already there.
- Architectural Plans: Plans, blueprints, and building permits were obtained.
- Schedule for Construction: A Step-by-Step Plan with Expected Completion Dates.
- Material Specifications: Detailing the kinds of things that will be used and how much of each one will be needed.
- Labor Needs: The number of workers and what they do.
- Permits and following the rules: All the relevant permissions have been granted.
- Marketing and Sales Strategy (if any): This is how you plan to rent or sell the home.
Financial Health: The Numbers Game
The Financial Deep Dive: What Lenders Analyze
3. Financial Statements: A Clear Snapshot of Your Health
It is essential to have correct and up-to-date financial statements when asking for a construction loan. Lenders typically require your financial records from the last three to five years to obtain a comprehensive view of your current and future economic health. These papers give a clear picture of how your company has done and its financial state over time.
At a certain point in time, the balance sheet accurately reflects your assets, liabilities, and net worth. It tells you what you own, what you owe, and how much of the business each owner owns. The profit and loss statement, also known as the income statement, shows your net income, costs, and sales over a specific period. It tells you how much money your business is making.
The cash flow sheet provides valuable insights into how cash flows in and out of your business. It shows how much cash you make from investing, financing, and running the business. It tells lenders how liquid you are and how quickly you can access funds to pay your bills. Another way to ensure the accuracy of the information in your financial records is to provide your loan provider with your most recent tax returns. The lender will gain a second perspective on your financial health in this manner.
Ultimately, these financial statements enable lenders to identify patterns, assess potential risks, and evaluate your business’s overall economic strength and ability to repay debt. Not only are they rules that you have to follow, but they are also essential tools for a complete financial analysis. People are more likely to trust you if you have substantial, steady financial success.
4. Credit Score and History: Your Reputation Precedes You
Many people who want to give you a construction loan will look at your credit history and score, which will include both personal and business details. These numbers indicate how honest and responsible you have been with money in the past. They show how much money you have. Lenders use them to determine if you will be able to repay a new loan responsibly and on time.
A good credit score shows that you can be counted on to meet your financial obligations, and this is likely to show in how you handle the money for your business. Similarly, a business’s dependability is demonstrated by its high credit score, which is achieved by consistently paying its suppliers and other creditors on time. Several factors lenders consider in your payment history to determine if you have ever been late, failed to make a payment, or declared bankruptcy.
Any past credit issues should be discussed openly and proactively, even if they may raise concerns. Concerns can be alleviated by discussing past problems and the steps taken to resolve them. Demonstrating that you’re better at managing your finances after a loss can improve your relationship with both private and business lenders.
If you have a good credit history with no significant problems, lenders are more likely to lend you money. It means you are less of a risk and more likely to repay the loan, which makes your application look more favorable. As a result, maintaining a high credit score is crucial for securing construction loans.
5. Collateral and Loan-to-Value (LTV) Ratio: Securing the Investment
Construction lenders and other lenders are less likely to lose money because collateral is a key way to protect the loan money. It shows what the borrower offers to give the lender if they can’t pay back the loan. To secure a construction loan, it’s essential to understand what collateral is and how it works.
One significant number is the Loan-to-Value (LTV) ratio, which is found by dividing the loan amount by the collateral’s projected value. Lenders will only give you a certain amount of money if this ratio is high. A lower LTV ratio means that the investor is taking on less risk, as it indicates that the collateral is worth more. This makes the loan more appealing to people who need to borrow money.
For each type of project, construction lenders and private lenders will accept different kinds of collateral. The land is often used as collateral for loans, especially for construction loans. This includes the land on which the building is to be built. Other assets, such as tools, inventory, or accounts receivable, can also be used as asset-based collateral. The type and quality of security you offer have a significant impact on the loan terms and interest rates.
| Asset Class | Typical LTV Ratio Range |
| Commercial Real Estate | 65% – 80% |
| Raw Land | 40% – 60% |
| Construction Projects | 60% – 75% |
| Equipment | 50% – 80% |
| Accounts Receivable | 70% – 90% |
6. Debt Service Coverage Ratio (DSCR): Can You Repay?
A key number that lenders use to determine if you can afford to pay your bills is the Debt Service Coverage Ratio (DSCR). Essentially, it examines the inflow and outflow of cash to cover bills. Lenders are more likely to give you a construction loan if your DSCR is high. This indicates that you can afford to repay the loan.
Divide the Net Operating Income (NOI) by the total yearly debt service, which includes both capital and interest payments. This gives you the Debt Service Coverage Ratio (DSCR). If your DSCR is 1.25, it means that for every dollar you owe, you have $1.25 coming in to pay off your debt. To ensure that the borrower can repay the loan, most lenders require a Debt Service Coverage Ratio (DSCR) of 1.20 or higher.
It is straightforward to understand the DSCR: if it is less than 1, it means you don’t have sufficient cash flow to cover your bills, which is a considerable risk. On the other hand, a number well above 1.0 means that it will be easy for you to meet your financial responsibilities. There is a clear, measured sign from this measure that you can pay back the loan.
One way to increase your DSCR is to increase your project’s net operating income. You can do this by charging higher rents or running it more efficiently. You can also explore ways to reduce your yearly debt payments, such as extending the loan term or consolidating bills with lower interest rates. To receive credit, you must demonstrate that your debt service coverage ratio (DSCR) is high.
IV. Beyond the Numbers: Other Key Considerations
Beyond the Numbers: Other Essential Elements
7. Equity Contribution: Showing Your Skin in the Game
Your stock contribution, also known as a down payment or user contribution, is a crucial part of the process that extends beyond the financial aspect. It indicates that you are prepared to invest your own money in a building project or real estate deal. Lenders view you putting a significant amount of your own money into a project as a strong indication that you believe it will succeed.
Your willingness to “skin in the game” means you are willing to share some of the risks with the lender. The lender doesn’t have to put up as much cash when you put up more equity. Ultimately, this reduces their risk and liability. Making this choice shows that you care about your project and want it to succeed.
Additionally, if you have a substantial amount of money, you can secure better loan terms, including lower interest rates and more flexible payment plans. You and the service can trust each other more and work together better. Finally, offering property as collateral to demonstrate your ability to repay the loan is an intense way to secure the funds you need.
8. Understanding Loan Terms and Loan Types
To secure the right construction loan, it is essential to understand the various loan terms and types. The length of the loan and the interest rate are two key loan terms that determine the total amount you repay and the overall cost of borrowing. To create effective long-term financial plans, it is essential to be aware of these effects.
There are many different types of loans available, each designed to meet a specific set of needs and project requirements. For instance, bridge loans are a quick and short-term way to obtain money, making them ideal for purchasing assets or filling funding gaps until more stable financing is secured. Hard money loans are a type of asset-based lending that usually has higher interest rates and faster approval times. Fix-and-flip projects use them a lot. Increasingly, property owners are utilizing DSCR loans because they focus on the property’s cash flow and needs based on the borrower’s income.
Options backed by the government, such as SBA loans, offer favorable terms and low interest rates, making them a suitable choice for many business needs. There are often rules associated with FHA commercial property investment loans that stipulate the loans can only be used for specific types of properties. Construction loans are designed to help individuals build from scratch or make significant improvements to existing homes. The money is distributed in stages as the building progresses. No-doc and lite-doc loans are available for individuals who don’t require extensive documentation. Some of these loans do have higher interest rates, though. There is another kind of loan called a state income loan.
Private loans differ significantly from regular bank loans in several essential ways. Typically, conventional banks have stricter guidelines regarding who can qualify for a loan. Private lenders like us, who are both correspondent and table lenders, usually offer you more choices, faster approval times, and more flexible terms, especially for complex tasks that require prompt completion. You can choose the best business partner if you know these things.
We offer a range of loan types here at CommercialConstructionLoans.Net to meet your needs:
- Bridge Loans
- Hard Money Loans
- DSCR Loans
- SBA Loans
- USDA B&I Loans
- FHA Commercial Property Investment Loans
- Construction Loans
- No-Doc Loans
- Lite-Doc Loans
- Stated Income Loans
- FHA Construction Loans
Partnering with CommercialConstructionLoans.Net for Your Loan Application
It doesn’t have to be hard to get a construction loan. CommercialConstructionLoans.Net has been screening individuals for over 30 years, so the application process is streamlined. We know more than anyone else about what buyers want because we deal with both buyers and loans. That is, we can ensure that your application is not only complete but also transparent. We can quickly connect you with the best private lenders and investors for your building project or real estate business, thanks to our extensive network of over 200 lenders and investors.
We’re proud of the diverse range of financial advice we provide. You can use these services to help you get a construction loan at every step of the way. Everyone on our team will do their best to assist you in getting in. They will help you understand the loan terms and refine your money and business plan. Speed and quality are always our top priorities. We typically provide an initial review within 48 hours, which will give you peace of mind and help you move forward. Additionally, we want both new and experienced traders to learn more about our referral programs, which can yield significant benefits. With these programs, there are more chances to invest in real estate.
Conclusion
Let’s say you need a loan to finance a construction project or an investment in real estate. In that case, it’s essential to understand what lenders consider. We’ve discussed eight key factors: a clear business plan, substantial collateral, a favorable loan-to-value (LTV) ratio, a high debt-service coverage ratio (DSCR), a considerable equity contribution, and a thorough understanding of the various loan terms and types. It is possible to get a construction loan if you plan and work with CommercialConstructionLoans.Net or another reputable lender. Don’t let the problem hold you back; contact us immediately to schedule a meeting or initiate the loan application process. We can help make your project ideas come to life.
FAQs
What is the typical timeframe for commercial loan approval after applying?
The lender and the complexity of your application will significantly impact how long it takes to obtain a construction loan. CommercialConstructionLoans.Net is an example of a private investor who can conduct an initial review within 48 hours. The approval process can take anywhere from a few days to several weeks or even months for more significant ideas, though. Several factors are taken into account, including the amount of information you have and how the lender processes loans internally.
Can I get a commercial loan if I have a new business or limited business history?
Even if the business is new or has only been open for a short time, it is still possible to get a commercial loan. Lenders usually like to see solid track records. Most of the time, you need a more substantial business plan, more funding, and a personal commitment to make this happen. Startups may find it easier to obtain certain types of loans, such as SBA loans or hard money loans because lenders are more interested in the project’s potential than in the borrower’s past financial history.
What if my commercial loan application is declined? What should I do next?
If your application for a construction loan is turned down, you need to know precisely why it was turned down. Most of the time, lenders will be happy to inform you about the issues with your application. This information can help you resolve any credit issues, improve your financial situation, or enhance your business plan. Usually, it’s best to make significant changes before asking again. For example, explore alternative loans or other funding options.
Do all commercial loans require personal guarantees from the business owners?
Some types of construction loans, such as those for personally owned companies, require personal guarantees from the owners. But sometimes this isn’t true. A personal promise means that the person is directly responsible for the debt if the company doesn’t pay. Larger, more established businesses with strong finances or certain types of asset-based lending can handle non-recourse loans more effectively because they don’t require a personal guarantee. On the other hand, it can be challenging for small and medium-sized businesses to get these loans.
Are there any specific industry considerations that might affect my commercial loan application?
The kind of business you have can have a significant impact on your application for a commercial loan. Most of the time, lenders have extensive knowledge about specific companies. They might look closely at those that have a background of high volatility or strict regulatory requirements. If, on the other hand, your industry is growing rapidly or aligns with a lender’s long-term objectives, that could be a positive sign. An investor who knows your business and the risks it faces is the best person to work with.