Commercial Finance

Monday, March 22, 2010

Commercial Mortgages - The 3 C's of Commercial Finance

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When pursuing financing, it's important to keep in mind that lenders are interested in making loans only to borrowers who handle money wisely. For most lenders, the evaluation of borrowers boils down to the three C's: cash, character, and collateral information.

Without these three elements in place, you'll be hard-pressed to obtain approval for your loan. This lesson summarizes the relevance of these critical factors.

Cash

Cash relates to your property's ability to repay its debt from the available net income or cash flow. Lenders want to know that you understand and are realistic about the mortgage you think your business can afford.

Most of the time lender's spend in the underwriting process involves thoroughly analyzing a property's cash flows, expenses and potential cash flows. Properly prepared loan requests present lenders with well documented historical and projected cash flow information.

(In an upcoming article, we'll explore how you can make sure your property has cash flow and meets the other cash-related requirements a lender might have.)

Another crucial item associated with cash that every lender will consider is how much money the borrower has at risk in the transaction. All quality lenders require you, the borrower, to have at least 10 percent of your own money in the transaction.

The concept of no-money down commercial mortgage financing is not a practical reality. If you are not willing or able to invest money into your project why would a bank take all the risk? It won't.

Many will also review your personal financial statement to determine that the loan you're requesting is not greater than your personal net worth--although there are ways to get around this requirement.

Credit

Credit provides lenders with a mathematical way to gauge your trustworthiness as the borrower. Your credit score is a result of your personal credit history and is based on your past and present usage of credit.

Any score above 680 will easily qualify you for the mortgage you seek. And there are still some commercial mortgage programs available for people with credit scores lower than 650. However, interest rates are significantly higher and the loan terms are more difficult.

It's also important to understand that in commercial lending, as opposed to residential lending, lenders look beyond your "credit score" to try and determine your "credit worthiness".

They are interested in understanding the specific line items in your credit report and making sure that you will be able to maintain the ability to pay your new debt after the transaction.

Because of this, your credit score is used more as a filter to eliminate marginal transactions than it is to qualify a transaction. Prospective borrowers with high credit scores are not necessarily deemed to be "credit worthy" for a proposed transaction.

Collateral

Collateral--the property being mortgaged--is at the heart of every commercial finance transaction. At the end of the day, lenders need to feel comfortable that in a worst-case scenario they could liquidate a property and recover any proceeds they might have loaned. This makes collateral a vital element in the financing decision.

Commercial appraisals will be required in order to determine the collateral value of your property for the purposes of a commercial mortgage. Do not order an appraisal yourself. Banks will only accept appraisals they ordered themselves.

Also know that the bank will use the lower of the appraised value or your purchase price when determining the collateral value for lending purposes.

If the property you are purchasing has appraised at $1 million, but the purchase price is $850,000, the bank will always calculate its loan size based on the lower value.

Understanding the 3 C's of commercial finance should help you understand a lender's decision making process. Wouldn't you use the same criteria before making a loan if it was your money at stake?

Article Source: http://EzineArticles.com/?expert=Ken_Kaplan

Labels: benefits commercial finance, commercial mortgages, the 3 C's commercial