Commercial Lending Basics

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Commercial Lending Basics

August 15th, 2008

Do you know what factors are considered when commercial lenders approve or deny your request for a commercial loan? Some people may not know all that is involved in the commercial loan process and the underwriting processes that take place every time someone applies for a new commercial loan.

There are four basic values that weigh heavily on a lender when making a decision to extend a loan to a commercial customer. The first commercial lending basic is cash flow analysis. It is in this phase when the commercial lender takes a complete analysis of the cash flow situation of the applicant. The property that is being considered has to have enough cash flow to be able to cover all of the expenses of the property that already exist as well as be able to cover the new expenses of the loan payment. This ratio that is used is called the DSC ratio. The number that different commercial lending officer’s use can differ but it is generally assumed that the minimum DSC ration must be at least 1.20.

The next commercial lending basic principle that is applied is the loan to value ratio or the LTV. This is used in commercial lending and tends to be very conservative. Commercial lenders will typically require a minimum down payment of 20 percent of the purchase price at the time of the loan. The remaining 80 percent will then turn into the loan amount for the new property. These figures can vary depending on a number of different factors including the creditworthiness of the applicant and the type of property.

LTV is the percentage of the commercial loan amount when divided by the purchase price. Any sum that is exceeding the lender’s LTV will then be required by the applicant as a down payment. If an appraisal is conducted on the property and it shows that the value is actually less than the purchase piece, the lender can then use the number that is lower to determine the amount of loan that will be approved.

The third commercial lending basic principle is the creditworthiness. In order for commercial loans to be given, the applicants must have a high credit score and enough credit to get the loan. If the applicant has been in business less than three years, the borrowers themselves will then need to be evaluated. For income commercial loans, the guarantors do not need to provide tax documents or personal financial statements. Those are determined on each different applicant.

The fourth commercial lending basic principle is that of property analysis and fair market value. In this, the fair market rent will be analyzed and reviewed. In this step, there can be an appraisal done of the property and those around it to determine whether or not the proposed property is worthy and has enough value to be financed for the amount purchased. There can be a number of different factors that goes into this step. Each lender has their own sets of requirements for guaranteeing new loans.

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