Most people understand the requirements for underwriting on residential mortgage loans, but not many understand the requirements of getting a commercial mortgage loan. There are certain guidelines for small to medium sized businesses to follow when they are trying to apply for a commercial lending loan. Many commercial lending LLC companies use the same kind of criteria and the same basic guidelines for underwriting loans.
There are four main areas that are considered by lenders when underwriting commercial real estate loans and these are known commonly as the 4 C’s that a commercial lending company uses to determine the lending process:
• Collateral – this is generally defined as assets that are used to secure a loan. In commercial lending LLC companies, the collateral is usually the commercial real estate and any improvements that include land, buildings and fixtures. The lenders will generally be willing to offer a loan amount in the 50 to 90 percent range for value of the real estate. The value of the commercial real estate is a key component in determining how much loan will be given.
• Cash flow – this is used by commercial lenders to evaluate the ability of how a business can repay the debt and maintain a comfortable margin to operate. There are two types of cash flow that lenders can analyze. There is traditional cash flow and actual cash flow. Most lenders rely on both methods for analyzing the cash flow of a business; some lenders rely more heavily on one kind than the other.
• Credit and financial analysis – lenders use this to obtain business credit reports and personal credit reports. They use both of these to determine if the persons and business are credit worthy and how they have handled their previous debts and loans in the past. This gives lenders an idea of how the business and people repay their debts and loans.
• Character and management – the ability of the owner to manage their businesses and the character of the owners and business can have a big effect on how the lenders underwrite the commercial loans. The areas that are typically measured include obtaining reasonable assurances that the management ability is adequate and capable of operating the business and that the business is being operated in an ethical manner.
These are the main areas that commercial lending LLC’s look at when determining the loan process for underwriting. There are other factors that are taken into account as well, as depending on the individual people and businesses involved. Other methods such as loan to value and value of the real estate are also taken into account when issuing loans.
It is important to understand how lenders view and analyze the ability of the owners and businesses to conduct their business and how they will be able to repay the loan. When you are ready to request a loan from the lenders for your business, you need to be sure that you are properly prepared for getting the loan and paying back the loan.
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Commercial Lending