How to get approved for commercial real estate financing
Asking for a commercial real estate loan can be daunting. More often than not, the fate of the purchase rests heavily on whether the bank says yes or no. However, a few important steps can boost your chances significantly.
“Put yourself in your banker’s shoes,” says BDC Director, Corporate Financing Jean-Sébastien Vincent. “Ask yourself what will put them at ease about giving you the loan.” Marc Noël-Corriveau, also a director for Corporate Financing, agrees: “A lot of businesses make a bad impression with the bank because they didn’t do their homework before the meeting.”
Here are seven crucial steps that Vincent and Noël-Corriveau say can help ensure you get a commercial real estate loan.
1. Show profitability
Start by making sure your company’s finances are in order. “The most important requirement for getting financing is having a profitable and growing company,” Vincent says. “A business with no profitability doesn’t have good chances. Banks like to see a proven record of profits.”
2. Assess your space needs
Carefully study your real estate needs. Bankers don’t look kindly on financing requests for poorly thought-out, spur-of-the-moment projects. They want to see evidence of solid planning.
Figure out your budget, desired locations and square footage needs; whether you want to buy or lease; and how you’ll accommodate projected growth. “A lot of businesses don’t do proper planning before buying real estate,” Noël-Corriveau says. “For example, businesses often buy a space to meet only their current needs and forget about future expansion.”
When budgeting, it’s important to consider not just the purchase price (or, if leasing, the base rent), but also extra costs associated with the property. Businesses often overlook or underestimate extras such as due diligence costs, renovations, production downtime during the transition, legal fees, recurring operational expenses for the property and, in the case of a lease, incidentals and leasehold improvements.
Be sure you prepare an effective budget for your commercial real estate purchase or lease.
3. Have a property in mind
Banks decide how much to lend based not only on your finances, but also on the type of building, and its condition, age and resale potential. Without a specific property, it’s hard for a bank to be precise on how much financing it can offer.
You can also leave a poor impression if it looks like you’re not a serious buyer and are wasting the banker’s time.
If you don’t already have a property in mind, a bank may agree to a preliminary meeting to give you a ballpark idea of how much financing it could provide. However, such a meeting is generally advisable only if you already have a good relationship with the banker.
4. Prepare your documents
Once you have a property in mind, prepare the documents you’ll need to show the bank. These include up-to-date financial statements, a solid business plan and details on the property you’re interested in. Banks also like to see evidence of an experienced management team.
“It’s like getting ready for a job interview,” Vincent says. “You should plan to make a good first impression, be on time for the meeting and be well prepared.”
5. Meet the bank before bidding
It’s best to meet your banker before bidding on the property you have in mind, especially if it’s your first foray into commercial real estate.
The bank will also advise you on its conditions for granting financing. Those may include obtaining environmental and building condition assessments, an appraisal, and a title search. It helps to use approved experts for this kind of due diligence, and each bank has its own list of such experts. If you use someone else, the bank may require a second opinion and the transaction could be delayed.
6. Give yourself time
Your purchase offer should also give the bank enough time to review the transaction. It’s common for offers to provide only 30 days, while banks often need six weeks—and possibly more, if due diligence issues arise.
“Businesses usually don’t give enough time for the bank’s due diligence,” says Vincent. “Then, the buyer and vendor can end up arguing about extensions to the offer, and the transaction can even be cancelled.”
7. Investigate loan terms, not just rates
When speaking with banks, look not only at their rates, but also their terms. These can sometimes be just as important to your bottom line.
- A key variable is the loan-to-value ratio— the portion of the property’s value that the bank will finance. Banks generally offer to finance 75% to 100% of the value of commercial real estate, depending on the building’s condition, resale potential and other factors. Any shortfall must usually come from the company’s working capital or the entrepreneur’s personal funds. A higher ratio means more money remains in your company in the near term to invest in growth or to cover cash flow shortages.
- A second variable is the amortization period. For a commercial real estate term loan, this usually ranges from 15 to 25 years. You may want a longer period in order to keep more money in your hands now.
- Third, consider the bank’s flexibility in offering loan repayment holidays. For example, you may be able to seek a holiday on capital repayments for one or two years post-transaction in order to absorb the cost and disruption of the move. Or, if you experience a cash crunch later, flexible terms could allow you to postpone repayments until you’re back on your feet.
- The bank may also be able to roll some or all of the cost of renovations into the term loan, particularly if they add value to the property. Be sure to thoroughly explore your bank’s various financing options—you may be pleasantly surprised at the opportunities they open up for your business.
Learn more about the steps to purchase commercial real estate for your business, including how to locate the right property and negotiate the best purchase price with our free guide for entrepreneurs: Buying Commercial Real Estate.