Funding is perhaps the most important part of an investment. After all, you can’t invest in something without the necessary funds to finance the investment. But is commercial financing a viable tool? Does it fast track success?
The key here is the ability to recognize when commercial financing will be beneficial to your enterprise at a given time – most especially for real estate/property management firms. In this guide, we answer the biggest questions to understand commercial financing.
A Decision That Requires Proper Planning
A loan may just be the stepping stone that you need to take your business to the next level. However, if you get one without careful planning you will end up on a path that leads to increased debt.
Will there be a viable return on investment in that case? Without a plan in place, then maybe that is not the best option.
Don’t expect to see a clear ROI if you didn’t prepare to repay your loan properly. A specific plan to repay the full loan will also help you determine whether you can afford commercial financing or not.
If your forecast shows that you can pay for it in time then go get it. But if not then you can either work out the kinks or just go for another form of financing altogether.
Why Get Commercial Financing?
Commercial financing refers to the offering of loans to various businesses. It is generally provided by banks and other financial lenders.
Note however that these loans are secured, which means that you will need to have some form of collateral. Well, not all financing will require business assets—some of them are unsecured.
Here are some of the assets that are used as collateral for commercial financing:
- Equipment
- Supplies
- Receivables
- Real estate
You should also note that larger and well-established companies are better able to secure commercial financing rather than small business.
If you have a small business then this may not be the best option for you at the moment. But that doesn’t mean you won’t be able to successfully secure one.
How to Secure a Commercial Loan
To effectively broker a deal you should use your available assets as collateral. We already mentioned a list of assets above that you can use. You will also be required to prove that you are creditworthy.
You should be able to demonstrate that your business is able to produce consistent cash flow. If you can prove this then it will assure the lender that the loan they will extend to you will be paid in accordance with the agreed-upon terms.
So how do you demonstrate your solvency and your positive cashflow? Well, financial lenders will usually require you to present your books. This will include your balance sheets and other related documents.
If your figures don’t look that good then it might not be the best time for you to get commercial financing. But if all looks well and good then you should prepare your cover sheet and everything else.
Now, you should also plan your finances ahead. That means you should factor in how much you will have to pay after the loan is issued.
The interest rate will usually be around the current prime lending rate at the time of the loan. Note that the bank or other financial lenders that you will borrow from will require you to submit your monthly financial statements.
You will be asked to submit these documents throughout the duration of your loan. On top of that, you ought to know that the lender may require you to take insurance when you purchase huge items using the money that your business borrowed.
Is It for Short Term or Long Term?
Commercial financing is usually used for the short term. Most companies use it for their operating and other immediate expenses.
These expenses may include the purchase of raw materials, the payment of employee salaries, and others.
Some financial lenders and banks may extend you a loan that can be extended indefinitely. These loans allow you to continue with your operations and pay for the original debt within the specified time period.
If you are looking for financing for the long term then maybe this type of financing is not the one you should opt for. However, if you just need a short fund boost then this might work out for you.
What’s Your Credit Score?
A financial lender will check the credit score of your business. Note that your credit score is not only useful to lenders—it is also useful to you.
Think of it as your personal proof of the solvency of your business. It’s a self-validation tool, as it were. A positive credit score also means that your business is fluid.
Remember that the higher your credit score the better are your chances of being approved for an SBA loan or even just a traditional loan. So, how high should your business credit score be?
Most financial lenders will consider a 550 or higher credit score. However, if you can push it as high as 700 then that would be awesome especially if you’re looking for some hard money real estate loans.
If your credit score is lower, then you should stay away from this type of real estate financing for now. Work on your credit rating first.
Time in Business
Note that the longer that you have been in business the better you will look in the eyes of financial lenders. If you have been business for many years, it is an indication for financial institutions that you are less of a risk.
Real Estate Collateral Value
Remember that real estate loans are definitely asset-based. That is why you should consider the real estate collateral value of the property that you are planning to purchase or develop.
Determine how much the property is worth and present this to your would-be lenders. This will help determine if you can pay back the money that was loaned to your business.
Debt Service Coverage Ratio
Your business debt service coverage ratio (DSCR) represents your annual income divided by the total loan payments that you have to make. A DSCR rating of 1 means your operations are just enough to make payments on your loan.
Generally speaking, you should have a DSCR higher than 1, which signifies positive cash flow. Commercial financing might then be a good option for you.
You can judge whether commercial financing is the key to your business success or not now that you know some of the key signals to look for. The more positives you get from the indicators above then the better are your chances of success.