Essential Considerations Before Applying for a Commercial Loan

Loans for commercial property are far more complicated than those you take out to buy a house. Typically, a commercial business loan has several functions. If you own a business, you can use the loan to buy real estate or equipment, expand your commercial facilities, enter new markets, pay off your debt, complete acquisitions, and a lot more. 

However, before processing a commercial loan, a little due diligence is required. This guide lists 5 essential considerations that you need to make before applying for a commercial business loan. Let's have a look! 

1. The purpose of the loan 

This is the initial step. The lender will evaluate your commercial property loan based on its objective. Generally, business loans are taken for:

• Investment purpose: This involves buying or refinancing a business property to rent for generating revenue. This is a low-risk purpose. 

• Financing your firm: Refinancing a commercial property to use equity to run or develop your firm.

• Purchasing a business: Refinancing a commercial property to use equity to buy a business.

• Other purposes: This involves other business, commercial, or investment purposes. These purposes are considered on a case-by-case basis.

2. The kind of security 

On passing a business loan, the lender is exposed to different degrees of risk depending on the type of security that is being financed. 

• Standard commercial property: Retail, factories, warehouses, offices, medical practices, showrooms, storage units, vacant land, and simple tenancies (one or two tenants) are a few examples of standard commercial property. Because standard commercial property security is zoned as either commercial, residential, industrial, or mixed, lenders generally view it as having a lower risk.

• Specialised commercial property: Land subdivisions, hotels, pubs, property developments, motels, multiple/complex tenancies, service stations, childcare centres, aged care facilities, shopping centres, accommodation, restaurants, and income-producing lands like farms, etc. are a few examples of specialised commercial properties. Because these properties are harder to evaluate and sell as compared to standard commercial buildings, lenders usually view them as carrying a higher risk.

3. Loan Documentation

Depending on the lender and type of product, you will need to provide different documentation. Some of these include a full doc, alt doc, lease doc, low doc, and forecasts.

4. Interest rate

Next up is the interest rate. The cost of funds generally varies from lender to lender based on where they get the money they lend out. Generally, lenders who have low business loan interest rates are the ones with low-risk appetite. 

Moreover, keep in mind that the interest rate offered by the lender depends on the loan size, LVR, and several other factors. 

5. Selecting and filing for a loan

Selecting the best lender that meets your needs is crucial because numerous lenders in the commercial sector have varying policies and risk appetites.

Upon choosing your lender, don’t fill out the application form and send them the required documentation straight. You must highlight what are the strengths of your application and what are the positives in your situation. It is all about presenting your case in a way the bank wants to see it.

Conclusion 

There is no one-size-fits-all policy when it comes to commercial business loans. This is yet another reason why having a solid approach to commercial loans is essential. In fact, with the availability of different loan apps in India, you can easily apply for a business loan. You can also apply for an instant business loan from the loan app if you are a small business. All you need to do is log in to the best business loan app of your preference, fill out the form, submit the documents and wait for the loan approval.